Recently, the performance expectations of the US stock market have been lowered, but the disclosed Q2 results have exceeded expectations. Since 2018, the performance of the S&P 500 has been exceeding expectations, but the deviation fluctuations between the US macroeconomic situation and expectations cannot explain the continued over-performance of the US stock market. Looking at the product structure, product sales of 10-30 billion yuan are 401/1288/60 million yuan respectively.
We found a clear downward trend in market consensus expectations for performance near the disclosure of earnings reports, which has led to a continuous over-performance of US stock market performance. However, this adjustment has little correlation with short-term stock price changes. The market is more concerned about changes in future prospects. Therefore, we have constructed a future 6-18 month (N18M) US stock performance expectation indicator, which is positively correlated with changes in stock prices within three days after the disclosure of financial reports, and therefore has guiding significance.
The downward adjustment of the current earnings expectations of the US stock market in this fiscal quarter is consistent with historical conditions. Moreover, the N18M earnings expectations show that the market's confidence in the future basic situation of the US stock market has not decreased. We believe that fluctuations in the recent performance expectations of the US stock market do not need to be overly concerned. In terms of industries, considering the recent upward adjustment of N18M earnings expectations, as well as the adjustment of current quarterly earnings expectations, we recommend paying close attention to the information technology, communications services, and real estate industries.
S&P 500's recent 24CY earnings forecast has shown a significant downward trend, but the Q2 24Q2 quarter that had been disclosed is better than expected.
Since July, there has been a clear downward trend in the expected full-year earnings of the S&P 500 index for 2024. As of July 19, the expected annual profit growth rate has decreased by 0.5 percentage points to 9.9% from the end of June. Excluding the magnificent seven, the remaining component stocks' expected earnings have also been adjusted downwards by 0.5 percentage points to 5.7%. Combined with the relatively pessimistic sentiment in the current US stock market, it has deepened investors' doubts. This period also happened to be the beginning of the 24Q2 financial report disclosure. As of July 19, 71 stocks in the S&P 500 components had disclosed financial reports, and the disclosed market value accounted for 15.3% of the overall index. From the disclosed financial reports, the total profit exceeded expectations by 5.0%, and the total revenue exceeded expectations by 0.5%.
Since 2018, the performance of the US stock market has been continuously exceeding expectations.
Looking back at the performance of all quarters of the S&P 500 component stocks (comparable caliber) since 2018, although the performance has fluctuated in terms of year-on-year growth rate, the performance of the entire US stock market has exceeded expectations for all 25 quarters (LSEG consensus expectations, the same below). Looking at individual stocks, nearly two-thirds of the individual stocks have exceeded earnings expectations in almost every quarter (+2.5%); although the proportion of individual stocks with revenue exceeding expectations is relatively low, it has continuously exceeded the proportion of those who did not meet expectations (-2.5%). Overall, the performance of the entire market or individual stocks has continuously exceeded expectations since 2018. In terms of industries, more than 90% of the quarterly profit amounts of industries such as medical care, real estate, and essential consumption exceeded market expectations; most industries' revenues were in line with expectations during the observation period, and the real estate and financial industries had more quarters with revenue exceeding expectations.
Compared with the continuous over-performance of corporate performance, the US macroeconomy has fluctuated significantly compared to expectations.
Although the trend of over-performance of the US stock market has continued, the US macro economy has not met expectations for a considerable period of time since 2018, which is significantly different from the situation in which the stock market performance has continuously exceeded expectations. Overall, there is no sustained over-performance of the US macro economy, and therefore, we judge that the continued over-performance of US stock market performance is largely unrelated to the deviation between macroeconomic and expected economic situations.
The core of the continuous over-performance of the US stock market performance lies in lowering expectations.
Looking at the statistical range, the average amplitude of US stock market profit exceeding expectations during the epidemic and post-epidemic recovery period is as high as 14.1%, and revenue reaches 3.3%. However, we found that except for the epidemic period, the expected earnings in the 30 days before the earnings forecast disclosure of each quarter showed a clear downward trend. The average expected earnings decreased by 1.9%. However, the financial report results significantly exceed expectations (average +5.7%). If we compare the actual values according to the market consensus expectations before the downward revision, some quarters are in line with expectations or below expectations, and the overall over-performance amplitude (average 3.7%) is significantly lower than the former. This phenomenon also exists in terms of revenue, but the amplitude is smaller. Therefore, we believe that there may be a normative suppression of market expectations for individual stock earnings performances by selling institutions who are studying the US stock market, which has led to the phenomenon of continuous over-performance of US stock market earnings.
However, the impact of changes in quarterly earnings expectations and deviations from expectations on stock prices is small.
Judging from the stock price, apart from the epidemic period, only 9 out of 17 quarters had some pressure on the stock price within 15 days before the financial report was disclosed. Only 4 quarters rebounded after the release of better-than-expected results. As for the overall statistics of 17 quarters, stocks that were downgraded and had better-than-expected results increased by 0.1% and 0.2%, respectively, in the 15 days prior to the financial report release. Therefore, we believe that the adjustment of performance expectations during the financial quarter can be regarded as market noise. However, from the company's guidance perspective, based on the first quarter of 2024, we also found that there is a low correlation between the deviation of quarterly profits from the company's guidance and the change in stock price after the performance disclosure.
We recommend paying attention to the expected changes in the next 6-18 months, which isolates market noise before the financial quarter and combines the future guidance given by the company.
Through individual cases, we speculate that the market may pay more attention to changes in the company's future guidance. However, since it is difficult to quantify and statistically monitor forward-looking indicators provided by the company, we have created a rolling future earnings expectation indicator for the next 6-18 months (N18M) which isolates market noise before the financial quarter and integrates the sell-side research on changes in the company's future outlook if any guidance is provided. When backtesting this indicator for the 17 quarters previously analyzed, we found that when the earnings or revenue changes of a single stock before and after the financial report exceeded 1%, if the earnings or revenue indicators were adjusted upwards, the stock price would increase by an average of 1.5% in three days. However, when the earnings and revenue indicators were both adjusted downwards by 1%, the stock price decreased by 0.9% and 1.5% respectively in three days. If both indicators were adjusted upwards or downwards, the stock price changed by 2.1% and -2.3% respectively. On the whole, this indicator is positively correlated with changes in stock prices, and can well track changes in fundamentals of the US stock market.
Recently, the profit forecast for the 2024 Q2 financial quarter has been downgraded, but the future outlook is stable and there is still support for the fundamentals of the US stock market.
We see that during this period, the downward revision of quarterly performance expectations conforms to the rules that we have summarized. Moreover, based on the fact that a large number of stocks have not yet entered the 30-day period before the disclosure of quarterly reports, during which there have been obvious downward revisions of expectations in the past, we believe that the performance expectations for this financial quarter will continue to be downgraded and will also have an impact on the full-year performance expectations for 2024. However, from the N18M expectation indicator that we created, we can see that during the same period, the expected earnings and revenue of the US stock market as a whole are still rising, and the confidence of performance growth remains strong. Therefore, we believe that the market's outlook for the fundamentals of the US stock market is still supportive. industry-level differences are also apparent. In recent months, industries with noticeable upward revisions in the N18M expectation include finance, information technology, communications services, real estate, and medical care, while other industries have varying degrees of downward revisions. Based on the current adjustment of performance expectations for this quarter, information technology, communications services, and real estate have strong fundamental support, while finance and medical care have downgraded performance expectations this quarter, but have experienced upward revisions in future outlook, therefore still have strong fundamental expectations. For energy and raw materials, support for their future fundamentals may be weaker.
Investment strategy:
1) The US economy is cooling better than expected; 2) US inflation data is higher than expected; 3) Overseas central banks provide monetary easing less than expected; 4) Liquidity risks in the US financial system; 5) Geopolitical conflicts are spreading; 6) Historical data has limited reference value.
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