- The consensus figure for Q1 has shown signs of improvement, hinting at a potential market upturn.
- Projections for Q2, Q3, and Q4 have also been on the rise, indicating a sustained positive trend.
- However, the FOMC and its interest rate decisions pose a risk that could trigger a market correction in the summer if not in line with market expectations.
As we inch closer to the pinnacle of the Q1 earnings reporting season, the stage is set for a promising outlook. Various factors point towards the continuation of the market rally not just during this period but potentially extending till the end of the year. On one front, earnings are on an upsurge, coupled with a promising growth forecast and positive alterations to the numerical representations. Nonetheless, lurking in the shadows is the looming risk associated with the FOMC’s stance on interest rates, gradually seeping into market sentiment.
A Promising Shift from a Downward Sentiment
The consensus figure for Q1 2024 earnings growth, as reported by Factset, has shown a decline over the past year. Yet, there are inklings in the data that signal a shift in this downtrend, possibly heralding a reversal in the days to come.
An ongoing positive narrative is the sustained growth in earnings for Q1 and the subsequent years, a trajectory that took root in 2023 and is foreseen to persist till 2025. Moreover, there are expectations of an acceleration in earnings growth over the next four quarters, with a likelihood of outperforming the current consensus figures by a significant margin—this lays emphasis on the importance of revisions in this landscape.
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Typically, the S&P 500 tends to surpass the consensus figure at the onset of each quarter, although there is a general downward trend prior to the cycle’s start. Interestingly, this year has witnessed a halt in the downtrend of revisions as the Q1 figure seems to have reached a bottom, while projections for Q2, Q3, and Q4 have steadied and are showing an upward curve. If this trajectory continues, the S&P 500 might trail along as the market integrates the heightened earnings potential, though not without the looming specter of downward revisions if results fail to make the desired impact.
Diverse Sector Performances: AI Taking the Lead in Growth
Expect a mixture of outcomes across sectors, with a forecast of growth in only seven out of eleven sectors. Yet, the silver lining emerges as upward revisions have been on the upswing, indicating a rise in the number of sectors and companies expected to display growth compared to earlier stages. Particularly, the Consumer Discretionary Select Sector appears to be the prime contender for favorable results, with an expected robust EPS growth rate, reflecting a sharp 1200 basis point surge in the last quarter.
Driving this growth narrative in the Discretionary sector is Amazon, bolstered also by the reinforcing trends witnessed in Nike and the cruise line industry. Amazon stands as a pivotal force behind the sector’s growth and revisions, with a concurrent positive momentum fueled by consumer and technological spending, especially with the increasing prominence of AWS driven by Artificial Intelligence.
In the realm of Information Technology, the sector has witnessed a considerable uplift in revisions in Q1 and is expected to rank fourth in terms of growth. The consensus has surged by over 700 basis points since the quarter’s kickoff, with NVIDIA spearheading this surge (NASDAQ:). NVIDIA’s anticipated triple-digit earnings growth and a 25% surge in consensus figures hint at further growth prospects ahead of the impending report.
The FOMC Presents a Looming Threat to Earnings Growth
The FOMC’s decisions on interest rates pose a direct challenge to the earnings growth of the S&P 500, with high rates potentially stifling consumer and business expenduture. The current concern stems from the possibility of the FOMC refraining from interest rate cuts in the coming months, which could significantly impact the earnings outlook. Mounting inflation figures have further exacerbated this scenario, prompting a market reevaluation of the potential rate cuts. The anticipated window for a singular cut now hovers around July, subject to shifts, thereby introducing a misalignment between the economic pivot required to propel earnings growth and the broader market anticipation. While the Q1 earnings reports could steer the market towards new highs, there remains a looming hazard of the S&P 500 peaking by June and undergoing a correction phase during the summer.
