The fourth quarter earnings season kicked off last week, and markets were generally left wanting more. That doesn’t necessarily mean this earnings season will be disappointing, especially considering the bar has been lowered so much. Plus, some of the disappointment was around special bank charges and November-quarter-end companies’ results were solid. This reporting period may lack the splashy “earnings recession over” headlines we got last quarter, but it takes on added importance because it sets the tone for 2024. After 2023 was a year in which improving valuations delivered strong gains, this year, earnings will likely have to do the heavy lifting.

One of the more interesting dynamics heading into the fourth quarter reporting period is how much expectations have come down during the past three months, despite the resilient U.S. economy. According to FactSet data, the consensus S&P 500 earnings per share estimate has been cut by 6.8% since September 30, the most since a similar cut in Q3 2022, and about double the average intra-quarter estimate cut over the past 10 years. The lowered consensus estimate implies just 1.3% year-over-year earnings growth for S&P 500 companies.

This outsized reduction in estimates could be interpreted in two ways: Either the low bar could set the stage for greater upside, or it could be a sign of additional weakness that markets have not observed just yet. In this case, there are signs pointing in both directions. On the plus side, a weak dollar is supportive of non-U.S. earnings and could be worth an additional percentage point to overall earnings. The average level of the currency was about 3% lower in the fourth quarter of 2023 than in the prior-year period. In addition, South Korean export growth, which has historically correlated well to S&P 500 earnings, has inflected higher and is a positive signal.

China is another concern and in 2024 faces some demanding challenges. As China emerged a year ago from the shadow of the stringent zero COVID-19-related measures that all but shut down its economy for over two years, much was expected in terms of its economic growth prospects. There were numerous reports suggesting the world’s second largest economy would ignite a bout of inflation as its industrial base would require vast quantities of commodities to power a newly energized China. Clearly that didn’t happen. Coming out of the pandemic, consumers initially enjoyed spending money as everyday life normalized, and China’s electric vehicle (EV) powerhouse, BYD Company Ltd. (BYD), ratcheted up production considerably. By the end of 2023, BYD had begun to challenge Tesla’s dominance in the EV global market.

Moreover, a raft of economic and political/military issues are cause for concern as global investors have looked elsewhere for direct investment opportunities. Flows into China’s public companies have been hampered by questions regarding regulations that seem to fluctuate on political whims. Analysts and investors seek answers as to how President Xi Jinping intends to galvanize the country’s domestic economy and once again attract global investors after dramatic underperformance by Chinese stocks relative to the U.S. in recent decades – a surprise for many investors.

LPL Research believes S&P 500 earnings can grow at a mid-to-high-single-digit pace in 2024, a number that can help keep this young Bull Market alive.

-Mark and Elise

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