US 4Q23 earnings wrap: The AI bull rages on

Published on March 8, 2024 by Susan Mathew and Rakesh Kumar

The S&P 500 has surged about 7.1% so far this year, riding the earnings momentum high, after major Wall Street banks kicked off the season on 12 January. Technology companies led the charge, with stellar results and forecasts from Nvidia, which designs chips that power almost all generative artificial intelligence (AI) technologies, leaving room for the rally to continue. The other mega-cap growth stocks that comprise the “Magnificent Seven” — Microsoft, Alphabet, Apple, Meta, Amazon.com and Tesla — also largely topped expectations.

Macroeconomic factors contributed to some volatility. Investors have been keenly tracking economic data to gauge when the Federal Reserve (Fed) could begin its interest rate easing cycle. Speculation of a cut in March was pushed out to the second quarter following hotter-than-expected inflation figures and as jobs data showed a still-tight labour market. Strong economic growth in 4Q23 also strengthened the higher-for-longer case. However, a slowdown in the housing market and mortgage rates easing from their peak in October 2023 keep alive the possibility of an easing cycle sooner rather than later. Money markets are currently pricing in a cut in July, with the odds of a June cut at around 60%.

Geopolitical concerns, including tensions in the Middle East, the Red Sea attacks and the Russia-Ukraine conflict, are expected to continue to weigh on markets. Elections in about 70 countries this year, including in the US, the UK and India, are also expected to add to volatility.

A closer look at some of the major 4Q23 beats and misses:

About 98% of the S&P 500 companies have reported earnings so far, with over 75% of them topping Bloomberg consensus expectations for net profit. Eight of the eleven sectors reported earnings growth on a year-over-year basis, led by the communication services, consumer discretionary, utilities and technology sectors. This is reflected in stock performance, with the communication services sector gaining 11.0% as of end-February, followed by a 10.5% climb in the technology sector. The two sectors have accounted for most of the S&P 500’s increase in the past two months. On the other hand, energy, materials and healthcare sectors reported a decline in earnings.

The outlook looks bleak. As of February end, 101 companies on the S&P 500 index have provided earnings per share (EPS) forecast for the current quarter. Of these, only 30 have issued earnings guidance above the Street estimates, while the remaining 71 fell short of consensus forecast for earnings, as per FactSet.

Technology: Nvidia turbo charges the AI drive

The sector, which boasts of Microsoft, Nvidia and Apple, saw about 87% of the reported results beat profit estimates. The aggregate net profit surprise percentage, or the average amount by which companies topped estimates, stood at 5.8%.

• Nvidia’s revenue nearly quadrupled to USD22.10bn in 4Q23 from a year ago, topping estimates. The company has forecast a 233% rise in revenue in the current quarter.

• While Apple and Microsoft also beat estimates, Apple forecasts a drop in iPhone sales and targets overall revenue of billions below expectations, as its China business took a hit.

What to watch:

• Nvidia’s ability to keep up with the spike in demand for AI chips

• Apple’s iPhone sales, especially in China

Healthcare: Pfizer, Merck surprise positively; Eli Lilly in the driver’s seat

About 80% of the healthcare results have topped profit estimates, and the sector has an aggregate profit surprise of 8.8%. Pfizer and Merck shone, delivering profits despite expectations of losses. The sector is up 6.3% this year, as of end-February.

• Eli Lilly delivered a 14% surprise in profits versus estimates. The stock has soared – earning the status of “growth stock” – due to its blockbuster weight-loss and diabetes (GLP-1) drugs Mounjaro and Zepboud, respectively, that rival European peer Novo Nordisk’s Wegovy and Ozempic.

• However, the sector’s earnings growth contracted about 16% over the quarter — the steepest contraction after the more-than-20% drop in both energy and materials.

What to watch:

• Whether Eli Lilly’s earnings beat would see it edge out Tesla permanently from the Magnificent Seven

• How well Eli Lilly’s GLP-1 drugs hold up against competition

• Catalent’s USD16.5bn buy-out by Novo Nordisk

• Whether the sector’s defensive advantage would help it withstand Fed-related and geopolitical uncertainty

Financials: Wall Street majors’ profits solid but regionals struggle

The sector reported the highest year-over-year revenue growth among sectors. Surprise-wise, companies in the sector topped profit estimates by about 10.3% on average. The average revenue beat at 1.4%, however, was one of the lowest among sectors. The S&P 500 financials index is up 7.3% this year, as of end-February.

• JP Morgan reiterated its dominance as the biggest bank on Wall Street with its USD24.2bn net interest income (NII) for the quarter, leaving its closest competitor behind by at least USD10bn.

• Among regional lenders, New York Community Bancorp reported an unexpected loss and slashed its dividends, sending tremors across the sector. Truist’s profits fell over 9% as it reported weaker NII and took a one-time charge of over USD6bn.

What to watch:

• NII: Wall Street majors have ridden the high-interest-rate environment, but with rate cuts on the horizon and bond yields dipping, NII may be pressured.

• Exposure to the dwindling commercial real estate sector leaves regional banks open to more pain

Energy: War drains

The sector reported the largest earnings decline year-over-year among the 11 sectors, down 24.7%.

• While Chevron and Exxon beat earnings expectations, they missed revenue estimates, Chevron by almost 8%. Crude prices have fallen 5% year-over-year and about 4.5% sequentially.

What to watch:

• Oil and gas price fluctuations amid tensions in the Middle East, attacks in the Red Sea and the ongoing Russia-Ukraine war. Crude prices are currently at around USD78/bbl, down approximately 18% from the peak of about USD93.7/bbl in September 2023

Communication services: Meta to the moon

The sector’s 49% profit growth year-over-year was the highest across S&P 500 sub-indices. It saw an average profit beat of 5%.

• Meta declared its first dividend, and its results and forecasts topped earnings estimates, accounting for more than half of the sector’s earnings growth.

• Streaming service Netflix missed profit estimates, but its revenue topped estimates due to the series “The Crown” and the movie “The Killer”.

What to watch:

• Meta’s metaverse investments and ad revenue

Consumer: Clicking in chilly weather

Consumer discretionary delivered the biggest aggregate profit surprise among sectors, at 13.8%. Its aggregate earnings growth rate was 28.7%.

• Amazon’s results were driven by strong revenue and margin expansion, market share gains and acceleration in AWS. New generative AI features in its ecommerce and cloud business bode well. These trends are set to continue in 2024, along with improvements in cost efficiency, advertising and free cashflow generation.

• A major upset was Tesla. Its revenue and earnings missed expectations, with the stock taking a hit after Chief Executive Elon Musk warned of a sharp slowdown in sales growth this year. The average selling price of its cars has also declined. The dull outlook and share moves could see it get pushed out from among the Magnificent Seven.

What to watch:

• US consumer spending figures

• Tesla’s car prices and China demand

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