Corporate profits in the fourth quarter of 2023 have exceeded expectations and are turning out to be the best of the year. Despite concerns about the macroeconomic environment and consumer sentiment, companies are reporting better-than-expected results. This unexpected trend can be attributed to several factors, including lower input costs, stronger focus on cost controls, and improved operational efficiencies.
Surpassing Expectations
Earnings season has showcased impressive performances from key players in the S&P 500, such as Amazon, Meta, Apple, Chevron, ExxonMobil, Merck, and Bristol Myers Squibb. These significant earnings beats have contributed to a notable increase in Q4 growth rates. LSEG, formerly Refinitiv, now forecasts an almost 8% rise in earnings growth for this season, surpassing the 4.7% expectation just three weeks ago.
Several sectors have stood out with stronger-than-expected results, namely Energy, Health Care, and Tech industries. In the Energy sector, approximately 90% of companies have exceeded earnings estimates, with profits surpassing expectations by almost 14%. Similarly, the Health Care sector has seen 85% of companies outperforming expectations, reporting earnings that are nearly 11% above estimates. The Tech sector has also demonstrated its strength, with 84% of companies posting earnings beats and exceeding expectations by over 5%.
The S&P 500 as a whole has shown impressive growth in Q4 with a current earnings per share growth rate of 7.8%, surpassing the 7.5% growth seen in Q3 and becoming the best performance of the year. About 80% of S&P 500 earnings results have exceeded estimates, slightly higher than historical trends. The overall earnings have surpassed expectations by more than 6%, although falling short of the 7% to 8% upside observed in the previous two quarters.
Adjusting Expectations
It is important to note that the strong figures reported in the fourth quarter come after a significant decline in earnings expectations leading up to the reporting season. Initial projections on October 1 anticipated an 11% year-over-year growth for S&P 500 fourth-quarter earnings. While there has been significant improvement since the start of 2024, the results still fall well below Wall Street’s expectations from just four months ago.
Despite the impressive fourth-quarter results, there is currently no positive momentum in earnings expectations going forward. First-quarter and full-year 2024 estimates have been revised downwards since the beginning of the year, as many companies have issued cautious guidance during this earnings season.
The unexpected rise in corporate profits during the fourth quarter of 2023 highlights the resilience and adaptability of companies facing macroeconomic concerns. Factors such as lower input costs, improved cost controls, and operational efficiencies have contributed to this surprising outcome. While the current earnings growth rate is impressive, it is essential to acknowledge that expectations had been significantly lowered prior to this earnings season. As companies adjust their outlook for the future, stakeholders will closely monitor the next quarters to identify potential growth opportunities and challenges in the corporate landscape.
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