One of Wall Street’s most-vocal bears is seeing signs of softness in corporate earnings that could impede stocks’ ability to continue climbing in 2024.
Michael Wilson, the top U.S. equity strategist at Morgan Stanley, expressed doubts about the ability of the biggest U.S.-traded companies to sustain their profit margins at the same aggressive pace as projected by Wall Street analysts for 2024. This could pose challenges for companies in meeting the lofty targets set for earnings growth.
Analysts have revised down their expectations for earnings growth for the ongoing quarter due to indications of declining profit margins. FactSet data, as cited by Wilson, demonstrates a notable decrease in EPS forecasts for the fourth quarter of 2023 since the end of September. The aggregate forecast for the S&P 500 SPX declined by 5.3% from $57.86 to $54.81.
While analysts still anticipate an impressive 11.8% earnings growth for the calendar year 2024, surpassing the 10-year average of 8.4%, Wilson and his team hold a more conservative perspective. They project a growth rate of only 7%, significantly below the consensus on Wall Street. The key factor influencing this outcome will be the ability of companies to expand their profit margins further, considering they are already relatively high.
In sum, signs of softness in corporate earnings are raising concerns about the stock market’s future growth prospects.
Outlook for EPS Growth and Margin Expansion
In a recent report, Wilson, an expert in the field, predicts a rebound in EPS growth of around 7% next year. However, he remains slightly less optimistic about the magnitude of margin expansion, expecting an increase of only 30 basis points year-over-year compared to the consensus estimate of 50 basis points. This cautious outlook is based on the potential persistence of earnings risk in the near term before a broader recovery takes hold as the year unfolds.
The Link Between Sales Growth and Wholesale Prices
As investors seek early indicators of future company performance, Wilson and his team advise clients to pay attention to wholesale prices. The team points out that companies’ ability to boost sales growth, a crucial factor in increasing profits, could be influenced by changes in wholesale prices. In the past, the finished-goods component of the index has served as a reliable leading indicator for revenue growth among S&P 500 firms.
Key Considerations: PPI Index Report
To gain more insights into this potential link, Wilson’s team will closely monitor the upcoming PPI Index report, scheduled for release on Wednesday. According to economists polled by The Wall Street Journal, the median forecast predicts a growth rate of just 0.1% for November. This follows a decline of 0.5% in October, the largest drop since April 2020. These figures will provide crucial clues about trends in wholesale prices and their impact on revenue growth.
The Influence of Profit-Margin Estimates
Earnings forecasts appear to be heavily influenced by profit-margin estimates. FactSet data reveals that the estimated net profit margin for the S&P 500 this quarter is projected to be 11.2%. This would be below the final reading of 12.2% for the third quarter and the five-year average of 11.4%. However, it is on par with the margin reported in the fourth quarter of the previous year when corporations experienced negative year-over-year growth in earnings per share.
A Promising Future
Despite these challenges, analysts on Wall Street have an optimistic outlook for the new year. They expect S&P 500 companies to report a profit margin of 12.3% in 2024. If this prediction materializes, it would be the second-highest annual net-profit margin since FactSet began tracking this metric in 2008. This projection indicates a positive trend towards improved profitability in the coming year.