JPMorgan strategists said consensus earnings growth forecasts have “declined materially” in the final months ahead of the 2024 first-quarter earnings season.
The annualized earnings per share (EPS) growth rate is now expected to be 3%, a sharp decline from last summer’s forecast of 10-12%. In Europe, Q1 growth is expected to be -11% year-on-year, with an average of -1% after adjusting for emissions.
Excluding the Magnificent Seven, S&P 500 earnings per share growth is forecast at -2.6% year over year, which would be the fifth consecutive negative quarter, JPMorgan said.
Despite lower earnings forecasts, there was a noticeable shift in activity during the quarter, as evidenced by a rise in global purchasing managers’ indices (PMIs). That improvement, along with a lower earnings barrier due to lowered forecasts, “suggests we will deliver stronger earnings,” JPMorgan strategists said in a note Monday.
However, this does not necessarily mean that the US stock market will rise if earnings data beat expectations.
“This is because the market was already heavily overvalued in the first quarter, and since the start of the year there has been a wide gap between Fed forecasts and equity index levels,” the strategists said.
“The risks of interest rates being raised for the “wrong reasons,” a complete Fed reversal, and inflation running too high are all elevated,” they added.
Moreover, geopolitical uncertainty remains fluid and any de-escalation may be temporary. These factors suggest that while earnings momentum is critical, it may primarily serve to support a market where risk premiums have already been significantly reduced, the strategists explain.
Additionally, consensus expectations predict sharp earnings growth in the coming quarters, with S&P 500 earnings forecast to rise nearly 20% from $55 in the first quarter to $65 by the fourth quarter. However, this ambitious growth trajectory faces the risk of disappointment as 2024 earnings per share forecasts “continue to decline in most regions,” JPMorgan strategists said.