Wentz Weekly Insights
Earnings Preview 2024

Stocks began 2024 on a different note than how it ended 2023. Last week, Treasuries fell as yields rose across the curve while stocks prices were mostly lower. It may be a combination of rebalancing/profit-taking and overbought conditions, along with starting the new year believing rate cuts may not be as aggressive as what was being priced in over the past several weeks. Based on interest rate futures, investors were betting we would see seven rate cuts in 2024, with the first coming as soon as March and that has since moved to six.
The S&P 500 and NASDAQ ended their nine week winning streak, the longest since 1985 for the S&P 500, ending the week 1.52% and 3.25% lower, respectively. Meanwhile, Treasury yields rose across the curve, ending a winning streak for bonds which saw one of its best stretches in years. At the same time, oil saw another week of gains over increased tensions in the Middle East and the important shipping route through the Red Sea and Suez Canal, although crude has been rangebound since November in the low $70/barrel range.
Looking ahead to this week, there will be more focus at the corporate level with several closely followed investor conferences; the JPMorgan Healthcare conference, the consumer-focused ICR conference, and the tech-focused CES conference. In addition, fourth quarter earnings seasons unofficially kicks off with some of the largest banks on Friday.
Despite the continued worries of a possible recession, estimates for earnings this year are still higher than 2023, although the range of estimates is wide, reflecting the degree of uncertainty for 2024. Taking all the earnings of companies in the S&P 500 and dividing it by the number of shares outstanding, the earnings per share for the index is expected to end 2023 around $218 per share, pending the results of the fourth quarter which we will see over the next several weeks. If earnings finish there that would be a 1.6% increase from 2022 levels, well below the historical average of 8.4%, according to FactSet. It would also be about 2% lower than where estimates were to begin the year (about $222 per share).
However, like with stock prices, the top seven names in the index drove a lot of the earnings increase. For example, Amazon was the largest contributor to earnings growth in the consumer discretionary sector. The sector saw earnings growth of 44%, but if Amazon is excluded, earnings growth for the sector would be just 16%.
Looking forward, the consensus estimate sees earnings increasing to $243 in 2024, or about 11.4%, with all sectors expected to contribute to earnings growth. Earnings growth is forecasted to be around 7% in the first quarter before accelerating to 18% by the fourth quarter.
The S&P 500 index ended 2023 trading at 21.9 times 2023 earnings (referred to as the price to earnings ratio – one of the most looked at valuation metrics that measures how much an investor is willing to pay for each dollar of earnings). The index began the year trading at about 17.2 times earnings, with almost all the increase in valuation coming from higher stock prices.
The S&P 500 is now trading at 19.3 times forward earnings (2024 earnings), which is above the long-term average of 17.5 times. If we use the long-term average forward price-to-earnings ratio to look at where that would value the S&P 500 that would put the index at 4,252, a level 9.5% lower than where the index currently stands. For stocks to more attractive, we need to see earnings accelerate faster than what is forecasted, or a pullback in stocks.
Looking on a shorter term basis, the fourth quarter is projected to see earnings growth of 1.8%, but this is down from 9.0% three months ago when the quarter started. While the expectation in earnings growth typically declines as the quarter progresses (analysts are usually more optimistic on the future), this is a much higher drop than usual. While Q4 numbers will be important, we will be (and we think markets will be) focused more on the 2024 outlook and how earnings expectations change over the course of the reporting season.
Week in Review:
After ending 2023 with a nine week winning streak and a 15% rally from the October lows, stocks took a breather to start the new year. While there was no specific catalyst, it may be due to a combination of overbought conditions, profit taking, and a flare up in tensions in the Middle East of Houthi rebel attacks on ships traveling through the Red Sea. There was some weakness in mega cap names, particularly Apple which saw an analyst downgrade over concerns of weaker iPhone sales. Data included manufacturing surveys that continued to show the industry remains in a recession, as well as construction spending that remains strong. Most of the stocks that accelerated in 2023 were the worst performers to start the year. The S&P 500 fell 0.6%, the NASDAQ fell 1.6% for its worst day since October, while the Dow squeezed out a small gain for a new record high close.
Data on Wednesday saw job openings relatively unchanged from November to December, while another manufacturing index came in negative. The release of the FOMC meeting minutes from the December meeting did not seem to provide any additional context on policy, but it may have been more hawkish than what markets have thought (see other news below for more details), and may be suggesting investors have gotten overly dovish on rate cuts this year. Oil saw gains of over 3% over additional tensions in the Red Sea, the shutdown of a large Libyan oilfield, and China talking about increasing imports. Stocks had another weak day, with small caps and tech the big underperformer again with small caps down 2.7% and the NASDAQ falling 1.2%.
It was another mixed day for markets on Thursday with most stocks lower and Treasury yields moving higher. There were several individual highlights including another analyst downgrade of Apple, a large downgrade to forecast by self-driving software firm Mobileye, and mixed earnings from Walgreens. Elsewhere, jobless claims moved to three month lows with ADP reporting more payroll gains than expected. The 10-year Treasury yield moved to 4.00% while the S&P 500 lost 0.34% on the day.
The jobs report Friday created some volatility in the morning, with stocks moving lower premarket and an uptick in Treasury yields after seeing more jobs added and a bigger increase in wages than expected. However, after digesting the report and seeing downward revisions from prior months and labor force participation that declined, markets ended up moving higher after the open. On a disappointing note, the ISM services index showed the slowest growth in the services sector of the economy since mid-2020. For the day the major indexes managed to squeeze a small gain, while small caps were down slightly.
Markets moved to a more defensive tone last week, reversing from much of the final three months of 2023. Treasuries were lower across the curve with yields higher as markets began thinking maybe we won’t see as many rate cuts as originally thought. The 2-year yield rose 15 basis points to 4.40% while the 10-year yield rose 17 bps to 4.05%. The dollar index rose about 1% for the best week since July, gold fell 1.1% after a very strong 2023, while crude oil increase 3.0%. Stocks were lower across the board with the S&P 500 and NASDAQ snapping a nine week winning streak (the longest since 1985), with the four major indexes finishing as follows: Dow -0.59%, S&P 500 -1.52%, NASDAQ -3.25%, and Russell 2000 -3.75%.

Recent Economic Data

  • The number of job openings on the last day of November was 8.790 million, little changed from the 8.852 million openings on the last day of October. This is down from the all-time high of over 12 million March 2022, but still above the pre-pandemic average of around 7.0 million. At the same time, the number of separations declined about 300k to 5.340 million, with the decline driven equally by quits and layoffs. Although job openings declined, they are still historically high, with separations declining to the lowest since early 2021.
  • ADP reported its data saw 164,000 new payrolls added in December, which was above the consensus estimate of 115,000. It saw hiring in all business sizes, small, medium, and large, and saw the most hiring in leisure & hospitality, health care, construction, financial services, with a small decline in manufacturing.
  • For the week ended December 30, there were 202,000 unemployment claims, a decline of 18k from the prior week, the second lowest level of initial claims of the past 11 months. The four-week average declined 5k to 207,750. The number of continuing claims was 1.855 million, down 31k from the prior week, with the four-week average relatively unchanged at 1.867 million.
  • The number of job gains jumped in December more than expected, according to the establishment data by the Department of Labor. The data showed 216,000 new payrolls in the month, above the consensus estimate of about 160,000, and increased back to the 12-month average of 225,000. Employment increased 2.7 million in 2023, lower than the 4.8 million increase in 2022, but closer to the historical average. The data saw employment continue to trend up in government, health care, social assistance, and construction, while manufacturing and transportation/warehousing lost jobs. Data from the household survey painted a different picture – employment fell by 683,000 to a level of 161.183 million, however, the labor force declined by nearly the same amount (676,000), resulting in a 0.3% drop in the participation rate to 62.5%. This is back to the lowest since the beginning of 2023 after being at the highest since pre-pandemic last month. This is an unusually large decline in the labor force, and unexplained so we will see if it reverts back in next month’s data. At the same time, the unemployment rate remained at 3.7% while the underemployment rate (the U-6 rate) moved back up to 7.1%. The other major data point in this series is average hourly earnings, which increased a more than expected 0.4% in the month with the 12-month change in wages of +4.1%, above the 3.9% expected and a bump higher from the 4.0% annual increase from November.
  • The US PMI manufacturing index was 47.9 for the final month of 2023, down slightly from 48.2 from November, signaling even weaker manufacturing activity in the US at the end of the year. The index is now in contraction territory (a reading of under 50) for eight consecutive months and 13 of the past 14 months. The report notes the downturn in new orders accelerated to the worst since August with output returning to declines over a faster fall in backlogs. Also a negative, inflationary pressures “intensified” as costs and selling prices increased.
  • The ISM manufacturing index was 47.4 for December, a slightly improvement from 46.7 from November, nonetheless remaining in contracting territory for the 14th consecutive month. New orders, backlogs, employment, and inventories continued to shrink, while production saw a small increase. the prices index saw a decline which was led by “soft energy markets” but offset by increases in steel and aluminum markets.
  • The ISM services index, an index on activity in the non-manufacturing sector, was 50.6 for December, continuing a streak of declines and lower than the 52.5 expected. Recall a reading above 50 reflects growing conditions and under 50 reflects contracting conditions. New orders, reflecting new activity, was 52.8 versus 56.0 expected, while employment fell to 43.3 for a surprise decline and the weakest since July 2020, and prices paid was 57.4, an increase from prior months suggesting price pressure remain elevated.
  • Construction spending in November increased 0.4%, slightly below the expected increase of 0.6%. Spending on residential rose 1.0% while spending on nonresidential fell 0.1%. Over the past year spending has increased 3.7%, which has been driven by a 18.1% increase in nonresidential and a 3.7% increase in residential spending.
  • Factory orders for November increased 2.6% in the month, a little better than expected and the best month since January 2021. However, most of the increase was due to transportation, specifically aircraft orders, which, due to their large order size, are extremely volatile month to month. Aircraft orders were up 80% in the month, after a 44% decline the prior month, while orders excluding transportation were up 0.1%. One of the more important readings, shipments of non-defense capital goods excluding transportation due to its input to GDP, declined 0.2% in the month, and is down an annualized 1.2% over the past three months.
  • The number of vehicle sales in 2023 was around 15.8 million, finishing the year about 13% higher than 2022’s level. General Motors and Toyota remained the top selling automakers, with GM making up about 2.6 million of those sales (up 14% from 2022) and Toyota making up 2.25 million vehicle sales (up about 7% from 2022). The 2023 sales figures were the highest since 2019 when sales were over the 17 million mark for the fifth consecutive year.

Company News

  • Oil producer APA Corp (formely known as Apache) said it has agreed to acquire Callon Petroleum for $4.5 billion in an all-stock transaction. The acquisition it says will help it boost its presence in the oil-rich Permian Basin. Apache is expected to issue new shares and under the deal Callon shareholders will receive 1.0425 shares of APA for each share of Callon owned.
  • Amazon’s share in online orders increased again over this past holiday shopping period, according to the package tracking app Route. It said from its 55 million orders tracked, Amazon captured 29% of global order volume in the final two weeks before Christmas, up from 21% the Black Friday weekend. Out of all weeks in the holiday shopping period, Amazon had the highest percentage of orders in the weeks closest to Christmas, most likely due to its speedy delivery time and two-day delivery for Prime items.
  • Microsoft said it will make the first change to PC keyboards since 1994. It said it will add an AI Copilot key in effort to integrate AI across its products. The new Copilot key will sit to the right of the space bar and is the first change since Microsoft added the Windows key nearly 30 years ago. Microsoft said it will show off its Windows 11 computers with the Copilot button at the CES conference this week. It says the button will act as a shortcut to allow users to use AI to create images, write emails, and summarize text.

Other News

  • The release of the FOMC’s meeting minutes showed there was not a clear discussion on rate cuts at the most recent meeting in December, whereas investors are still betting the first rate cut could happen in as soon as two meetings from now (March). It showed policymakers agreed that the current policy rate was at or near peak, but a number of participants said there is downside risk of keeping the policy rate too high for too long. Most policymakers said it could be appropriate for the level of rates to be lower in 2024 than 2023 but still too early to tell and they need more evidence that it is coming back down to target, which may be suggesting investors have gotten overly dovish on rate cuts this year. Also noted that recent easing in financial conditions could make it more difficult in its efforts to control inflation.
  • As a follow up to last week’s newsletter, tensions in the Red Sea remain high over ongoing attacks on shipping vessels that utilize the shipping route. One of the world’s top shippers, Maersk, said it will divert all of its vessels away from the Red Sea for the “foreseeable future” and warned its customers to expect significant disruptions to the global shipping network. Beside longer wait times for shipments, another consequence is shipping rates have soared back to the highest level they were since the bottlenecks from the pandemic reopening. As Bloomberg reported, the spot rate for shipping goods in a 40-foot container from Asia to northern Europe is now over $4,000, a 173% increase from mid-December. The alternative route is south past the Cape of Good Hope in southern Africa, which is much longer and more costly.
  • Over the weekend, House and Senate leaders said they have come to an agreement on how to fund the discretionary portion of the government for fiscal year 2024 and includes $886 billion in defense and $733 in non-defense spending. These are top line numbers, so before a vote happens Congressional leaders will still need to fine tune the details and draft the legislation. Back in November, Congress passed a short term bill to keep the government funded until January 16, which now becomes the next deadline at which time several funding levels expire, then February 2 when all expire.

Did You Know…?

The Growing Deficit

Last week, the U.S. Treasury Department announced the government’s debt surpassed $34 trillion for the first time. This comes just four months after the debt passed $33 trillion, driven by falling tax revenues and rising federal spending. In fiscal year 2023 (the 12-month period ending September 30), the government ran a deficit of $1.7 trillion, $320 billion, or 23% more than 2022’s deficit. One of the biggest factors of the higher deficit was a 33% increase in the cost to service the debt, i.e., higher interest on the debt due to rising interest rates. The 2023 deficit was 6.2% of GDP. The current level of debt is now 123% of U.S. GDP. The chart below shows the level of debt as a percent of GDP since 1965.

WFG News

Economic & Market Outlook Meeting

Thursday, February 1 – 6:00 pm – WFG Auditorium in Hudson, OH
Thursday, February 8 – 12:00 pm – WFG Auditorium in Hudson, OH
Thursday, February 8 – 6:00 pm – WFG Auditorium in Hudson, OH
Wentz Financial Group will be holding its semi-annual Economic and Market Outlook Seminars on the dates above. Join us as we recap a surprisingly positive 2023, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in another challenging year ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.

The Week Ahead

Activity will pick up this week with several important data releases, the start of fourth quarter earnings seasons and several big corporate conferences. On the data side, the highlight of the week will be the consumer price index report on Thursday morning where consensus sees prices rising 0.2% in December with the year-over-year rate ticking up to 3.2% but falling to 3.8% at the core level. Elsewhere, trade data comes out Tuesday, jobless claims on Thursday, and the producer price index on Friday. In the Treasury market there may be heightened attention on the upcoming Treasury auctions mid-week. On the Fed front, we will see several public appearances from policymakers throughout the week. On the corporate side, the big conferences include one of the biggest tech conferences of the year – the Consumer Electronic Show (CES) in Las Vegas, the JPMorgan Healthcare Conference, and the ICR Conference which focuses on consumer companies. Finally, Friday is the unofficial beginning of fourth quarter earnings season which starts with some of the biggest banks including JPMorgan, Bank of America, Wells Fargo, and BlackRock. Other notable companies reporting this week include Albertsons on Tuesday, KB Homes on Wednesday, and UnitedHealth and Delta Airlines on Friday.