Is the “decline in earnings” in US stocks over? Wall Street's top strategists have mixed opinions

Zhitong Finance ·  11/20 23:16

When it comes to the profit prospects of US companies next year, some top Wall Street strategists disagree. Citi strategist Scott Chronert predicts that even if the US economy falls into recession, corporate profits will remain unchanged; while J.P. Morgan strategist Mislav Matejka said that regardless of whether the economy shrinks or not, the decline in pricing capacity will affect the company's overall revenue and profit margin.

According to a Citi index, the number of companies that have lowered the profit expectations of US companies has exceeded the number of companies that have raised for 9 consecutive weeks. This is the longest time since February of this year. Chronert expects analysts' expectations for 2024 to decline in the next quarter, but this will only lower the threshold for companies to exceed expectations.

Chronert wrote in a November 17 report that speaking about earnings in 2024, despite the risk of economic contraction, he believes the industry's growth prospects are “more consistent.” “Our top-down view is that profits can grow even in a mild recession,” the strategist said.

In July of this year, at$S&P 500 Index(.SPX.US)$After a sharp rise in the first half of the year, Chronert raised its target for the end of 2023 to 4600 points. The index is currently less than 2% away from this level. According to the data, analysts expect earnings in 2024 to rebound 11% after falling 0.5% for the full year of 2023.

As the earnings season nears its end, the latest data shows that the S&P 500 earnings decline has come to an end. But this does not mean that the future for US companies is clear. According to the data, profit increased 4% year on year, while analysts' forecast was a 1.2% decline. More than 90% of the S&P 500 index constituent stock companies have announced their third quarter results, which means that the three-quarter profit decline may have ended, and preparations are being made to end the profit decline one quarter earlier than expected.

However, in a situation where interest rates remain high, risks to the US economy are piling up, and things like$Target(TGT.US)$with$Walmart(WMT.US)$Such leaders are already concerned about the health of consumers, and consumer spending is the engine that drives two-thirds of the US economy.

Louise Goudy Willmering, partner at wealth management firm Crewe Advisors, said: “The future for retailers is uncertain because consumers are capricious. Although in the past we have seen a rapid shift in consumer willingness to spend on non-essential items, we haven't seen a significant slowdown in spending. If anything, it could continue until 2024.”

Although the S&P 500 index rose 18% this year, Matejka remains pessimistic about the stock market. Matejka wrote in a report: “Given the 'higher starting point of profit margin', next year's profit growth is likely to be more moderate rather than rising, and this is not based on a recession. If we experience a complete contraction, then corporate profits are likely to decline.”

The resumption of profit growth will bring necessary benefits to the US stock market before the end of the year, adding impetus to the market's rebound in November. But the retailer's pessimistic predictions could disrupt this rally and damage Wall Street's hopes that falling inflation and rising wages will spur shoppers to open their wallets.

Investors still remember the difficult holiday shopping season last year, when due to increased inflation, consumers tended to buy necessities such as groceries and cleaning supplies, and retailers struggled with inventories. This is why Walmart's cautious tone has heightened concerns about demand. A company executive said sales declined at the end of October before promotions and holiday shopping boosted sales this month.

In the three months to the end of October, after excluding fuel and energy projects, Walmart's US branch's same-store sales increased 4.9% year over year.$Target(TGT.US)$with$Home Depot(HD.US)$The decline in this indicator was announced this week as consumers continue to reduce purchases of non-essential goods.$Gap Inc(GPS.US)$There was also a quarterly decline in same-store sales, but its value-oriented Old Navy brand performed strongly.

Retail sales in the US fell last month, but the decline was less than expected, which strengthened the belief of bullies that Americans are still willing to spend. According to the National Retail Federation, this year's holiday sales will increase 3% to 4% compared to last year. This estimate is roughly in line with 2019 levels.

However, against the backdrop of the Federal Reserve's massive interest rate hike, US consumer spending is still being hampered, and retail stocks have experienced a challenging 2023. ranging$Amazon(AMZN.US)$,$Costco(COST.US)$with$Dollar Tree(DLTR.US)$The S&P Retail Select Industry Index, which included, only rose about 4%, while the S&P 500 index rose nearly 18%.


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