The earnings for Q4 2023 are now largely complete, with many interesting glimpses into what is happening with companies and their customers.
To start, some general statistics: (1)
- 73% of companies beat their earnings estimates – this is slightly lower than the 5-year average of 77%.
- 64% of companies beat their revenue estimates – again, slightly lower than the 5-year average of 68%.
- Within sectors, Technology reported the highest percent of “beats” (88%) while Real Estate was the lowest (55%).
When companies report their earnings, stock prices often respond favorably to surpassing expectations and unfavorably to falling short of estimates. During this most recent earnings season, beats generated a stronger-than-average positive reaction, whereas companies that fell short of expectations generated a weaker-than-average negative reaction. The S&P 500 performance, in general, was relatively positive during this time, which may have influenced this trend.
Source: FactSet Earnings Insight
One of the largest topics of discussion during earnings calls was inflation, with over half of the S&P 500 companies addressing it. Clearly, the trend of inflation (both rising and falling) is still having a significant impact on company earnings’ trends as well as consumer behavior.
The spotlight in this ongoing market rally often remains fixated on the Technology sector, but the Industrials sector has emerged as another standout performer. As reflected in the chart below, Industrials stocks have the highest percentage of companies at all-time highs, surpassing both Healthcare and Technology. Further, the performance in the Industrials sector has outperformed the S&P since the October 2023 lows.(2)
Source: FactSet Earnings Insight
This robust performance may be a result of initiatives like “reshoring” (companies returning to building their supplies in the U.S. instead of offshore) as a way to avoid heightened geopolitical tensions and supply chain disruptions. Also, fiscal spending initiatives like the Inflation Reduction Act and CHIPS Act may have favored companies that are responsible for building and logistics, which are prevalent in the Industrials sector.
In 2023, investors were concerned about the high levels of concentration among the “magnificent seven” stocks (Microsoft, Amazon, Google, Apple, Meta, Tesla, and Nvidia). Recently, as evidenced by Industrials performance, stock performance has been more broad and less defined by this relatively small subset of companies. At Gradient Investments, we welcome a more broad-based rally, as prudently diversified portfolios succeed with broader participation over concentrated allocations that can increase portfolio risk.
(1)FactSet Earnings Insight, as of 02.29.2024
(2)FactSet, (S&P500 October low 10.27.2023)