Nearly all S&P 500 companies have reported their fourth-quarter results, with three-quarters beating Wall Street’s expectations.
Earnings Growth Across Sectors
The aggregated earnings for S&P 500 companies increased by 4% in the fourth quarter compared to a year earlier. The communication services, consumer discretionary, utilities, and information technology sectors led the way with earnings growth ranging from 23% to 45%. Meta Platforms and Amazon.com were significant contributors to this growth.
On the other hand, energy, materials, healthcare, and financials saw declines in profit from the year-ago period. Pfizer, Merck, and banks were among the companies that dragged down earnings in these sectors.
Revenue Growth and Decline
Revenues across the S&P 500 grew by 4.2% from a year ago. Real estate companies reported the highest revenue growth at 8.3%, while energy companies saw a decline of 9.3% due to industry-specific challenges.
Exceeding Expectations
In the fourth quarter, 73% of S&P 500 companies surpassed Wall Street’s expectations for earnings per share, while 64% reported higher revenues than anticipated. Although slightly below the five-year average, some companies like Illumina and Uber Technologies exceeded predictions by a significant margin.
Overall, while the results are positive, they fall slightly short of recent years’ outperformance levels.
Financial Landscape Overview
In a surprising turn of events, Citigroup reported significant losses in the fourth quarter with a deficit of $1.16 per share, far below the Wall Street consensus of an 11 cents profit. Similarly, Truist Financial also struggled, losing $3.85 per share compared to the expected 68 cents gain. The drastic misses by these leading financial institutions have raised concerns about the market’s stability.
Economic Trends and Projections
Despite concerns over inflation and recession risks due to the Federal Reserve’s multiple rate hikes, unemployment has remained low while inflation has gradually stabilized. This positive economic backdrop has fueled optimism for an “economic soft landing,” reflected in record-breaking stock market performance, particularly in the tech sector driven by the excitement surrounding generative AI.
The S&P 500 index has surged 27% over the past year, with an additional 8% increase year-to-date. Analysts anticipate further growth, projecting a 3.6% year-over-year earnings increase for the first quarter of 2024 and an 11% growth for the full year. However, energy and materials sectors are likely to experience decreased profits compared to other sectors.
Market Outlook and Valuations
As companies release their earnings guidance, the sentiment is mixed. Over half of the companies have provided weaker outlooks than what analysts anticipated for both quarterly and yearly results, contributing to concerns about overall market valuation.
Currently, the S&P 500 index is trading at 20.4 times forward 12-month earnings, exceeding its historical averages. However, not all sectors share this expensive valuation. Energy and utility stocks are trading below their 10-year averages, presenting potential opportunities for investors seeking value in the market.
Analyst Predictions and Sector Insights
With over 11,000 stock ratings on S&P 500 companies, analysts collectively anticipate a 10% growth in the index over the next year. The energy and communication services sectors are expected to lead with significant upside potential of 17.7% and 14.5%, respectively. On the other hand, industrials and materials stocks are projected to see more modest price increases at 5.8% and 6.4%.
