High-flying profit forecasts head back down to Earth

(Bloomberg) — Investors anticipating blockbuster profits in 2024 will be disappointed, according to Bloomberg’s latest Markets Live Pulse survey.

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The consensus estimate of sell-side analysts is that S&P 500 earnings this year will reach historic levels, but those forecasts are too high, according to 50% of 380 MLIV Pulse respondents. The poll shows an economic slowdown is the biggest risk for the bottom lines this year.

The findings imply profits won’t be a key catalyst for stock market gains this year after a 24% rally in the S&P 500 in 2023. While corporate earnings held up better-than-estimated last year, helping boost stock valuations, the key US index snapped a nine-week gaining streak in the first week of January.

“Investors have priced significant expectations of a benign soft-landing scenario for 2024,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA. “I am more cautious.”

Economic weakness could result from faltering US consumer spending growth, according to 40% of participants. Another 38% expect this year’s shopping patterns to mirror last year’s, allowing for a Goldilocks scenario where the economy is not running too hot or too cold.

“Earnings expectations seem a bit high in some areas, like some consumer areas, for example,” said Nicole Kornitzer, portfolio manager of the Buffalo International Fund at Kornitzer Capital Management Inc. “Consumers seem to be frustrated by all the past price hikes.”

As a result, the majority of respondents are counting on so-called value stocks, such as JPMorgan Chase & Co. or oil giant Exxon Mobil Corp., as a winning strategy this year. Shares of JPMorgan, which kicks off earnings season on Jan. 12 when it reports results, already hit a record this year.

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And even as value stocks are expected to lead, survey participants foresee the top six lenders in the US to keep focusing on cost management by maintaining head count. Only 3% assume the biggest banks will expand their workforce with the majority roughly split between expecting banks to keep employment flat or continuing to cut jobs.

De Mello said financials and energy — key value sectors — could have different trajectories this year. “Financials are still reasonably priced while energy stocks will depend on the oil price” which is one of the main conduits of geopolitical risk into the financial markets, and geopolitical risk is rising, he added.

Still, the preference for value signals a likely end to 2023’s growth-stock fueled equity market boon. In 2023, the biggest gainer on the Nasdaq 100, Nvidia Corp., more than tripled in value closing last year at $495 a share, but 86% of respondents don’t expect the chipmaker to reach $1,000 this year.

Bullishness has likely peaked for now. HSBC Holdings Plc strategist Max Kettner cut his overweight stance on equities to a tactical underweight, awaiting a better re-entry point, such as when sentiment and positioning become less stretched again. Sanford C. Bernstein strategists Sarah McCarthy and Mark Diver also recommend short-term caution on equities after extreme bullish sentiment.

Nonetheless, Wall Street strategists and investors alike still expect equity markets to rally in 2024. Almost a third of respondents plan to increase their exposure to S&P 500 over the next month, the highest level since the MLIV Pulse survey started asking the question in August 2022.

“Markets need to breathe from time to time. You have to consider that against the fact that investors are still highly skeptical of the economy and earnings,” said eToro US investment analyst Callie Cox. “Spending is holding up well, but profit growth is expected to come from cost-cutting. It’s progress, but not the kind of progress you’d ideally like to see. Investors could struggle with this dynamic.”

The MLIV Pulse survey was conducted among Bloomberg readers on the terminal and online by Bloomberg’s Markets Live team, which also runs the MLIV blog. This week, the survey focuses on the impact that aging societies and changing retirement-saving patterns have on stocks and bonds. Click here to share your views.

This story was produced with the assistance of Bloomberg Automation.

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