The Strategist

Lessons from the Q4 reporting season

The 2023 reporting season shows mixed economic results worldwide. While the US market is experiencing a moderate recovery, Europe continues to struggle with declining profits. The following article analyses these developments and takes a look at expectations for the first quarter of 2024.

Georg Ruzicka, Head Equity Research LGT Private Banking
Reading time
10 minutes
Q4 reporting season
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The reporting season for the fourth quarter and full year 2023 is drawing to a close in all regions. As usual, we start with a review of the US market. After three consecutive quarters of earnings recession, Q3 2023 showed an initial stabilisation, followed by a turnaround in earnings momentum in Q4 2023. Earnings growth for the S&P 500 was around +7% year-on-year, around four percentage points higher than at the start of the reporting season. Earnings growth of +7% in the fourth quarter also shows a moderate acceleration compared with earnings growth of just +4% in the previous quarter. Overall sales growth was +3.7% in nominal terms and a modest +0.7% in real terms compared with the previous year. These are significantly weaker figures than the solid US economic growth in the fourth quarter of 2023 would suggest. 

This can be explained by the different weighting of the drivers of the S&P 500 and those of US GDP. Manufacturing respectively goods industry, which was in recession in 2023, accounts for only 18% of US GDP, but is estimated to contribute around 51% of S&P 500 sales. The much stronger momentum in the more important service sector of the US economy is therefore reflected to a below-average extent in the sales momentum of the S&P 500. It is therefore not surprising that the mention of "weak demand" in Q4 2023 has reached a new high since the Covid pandemic. Cost-cutting measures and margin improvements have therefore also contributed to overall profit growth. The earnings season has been accompanied by a number of announcements of mass layoffs, including in the technology and banking sectors.

Beneath the surface, however, there are also extremely divergent trends. The so-called "magnificent seven" achieved earnings growth of around +56% year-on-year in the fourth quarter, while the "S&P 493" (S&P 500 excluding these seven companies) recorded negative earnings growth of -2% year-over-year. The fourth quarter was an exceptional quarter in this respect. While the "magnificent seven" will likely continue to generate earnings growth well above the overall market, this huge gap should narrow significantly over the course of 2024. Current estimates for S&P 500 sales and earnings growth in the first quarter of 2024 are both +3.6% year-over-year. For the full year 2024, consensus expectations are currently for sales growth of +5.0% and earnings growth of +11%.

And outside the US?

Europe slipped into a profit recession about two quarters after the US and remained there in the fourth quarter of 2023. With a clear contraction in sales, the bottom line was earnings growth of -11% compared to the previous year, about two percentage points below expectations. The consumer discretionary and industrial sectors had the highest number of profit warnings. By contrast, the technology and healthcare sectors stood out positively with profit growth of +12% each. 

It takes a lot of goodwill to interpret the European reporting season positively. Earnings growth of -11% represents a sequential improvement on the previous quarter's -16%. Investors punished misses on expectations less severely, while positive surprises were rewarded more strongly again. The latter is likely also due to the low number of positive surprises, the lowest since 2018. In terms of ongoing earnings revisions, the European equity market recorded one of the most negative starts to the quarterly reporting season in many years. Earnings growth expectations for the first quarter of 2024 were also hit and now stand at a revised -16%. However, following these latest negative estimate revisions, expectations for the next twelve months appear to be slowly stabilising. Q1 2024 could therefore mark a potential low point in the European earnings recession. For the full year 2024, the current consensus is for slightly positive earnings growth of +4% for European equities (Stoxx Europe 600). 

Finally, the Japanese market has achieved average earnings growth of +10% year-on-year, with average sales growth of around +2%. As an export nation, Japanese companies continue to benefit from a weak domestic currency.

Conclusion: Ground frost or spring fever?

The fourth quarter reporting season was better than expected for the US market, with a gradual improvement over the previous quarter. The current, rather modest-looking expectations for the first quarter of 2024 provide a reasonable basis for the market to beat. In Europe, another quarter of double-digit profit declines followed. While Q4 2023 showed a gradual improvement compared to the previous quarter, Q1 2024 is unfortunately expected to show another gradual deterioration, which could possibly mark a low point. On a global basis, earnings revisions remained below one in February, meaning that more companies saw their estimates lowered than raised. February saw gradual improvements for the US, Japan and emerging markets, while Europe remained in negative territory. 

Based on analyses going back to 1988, the months of March to May on average show positive seasonality, with earnings revisions historically trending mostly upwards. One could therefore draw the following conclusion: "We can still expect isolated frosts on the ground, but signs of spring are in the air".

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