The resilience of the stock market this year has taken many by surprise, with a significant rally that has pushed the S&P 500 index up by 29% since a notable dip in October. This surge isn’t just about the tech giants; it’s spread across various sectors, buoyed by the belief that corporate earnings will grow and the Federal Reserve’s policies will not hinder economic expansion. Even as inflation data comes in higher than expected, keeping the Fed from reducing rates just yet, the market’s optimism has not waned.
Analysts have been closely monitoring the S&P 500’s performance, anticipating earnings to not only recover but to gain momentum as the year progresses. This outlook is bolstered by numerous companies projecting strong performances in the latter half of the year, undeterred by the potential impact of rising interest rates. Adam Parker of Trivariate Research highlights a trend where despite some adjustments to Q1 forecasts, companies are maintaining their full-year outlooks for 2024, suggesting an underlying confidence in the market’s strength.
Following a modest growth in S&P 500 earnings per share of less than 2% in 2023, expectations for 2024 are much more ambitious, with analysts predicting an 11% increase to $242. This optimism is based on a combination of factors including moderate sales growth, improving profit margins thanks to easing cost inflation, and the impact of share repurchase programs.
The latter half of 2024 is pivotal for these forecasts to materialize. While first-half earnings per share are predicted at $114, a simple extrapolation would fall short of the year’s expectations. Analysts are banking on a second-half surge to $128 per share, marking a significant 12% increase from the first half and one of the most substantial rebounds in two decades.
However, this scenario also presents a risk. Should earnings not meet these ambitious targets, the market could face downward pressure. Lori Calvasina of RBC Capital Markets cautions that high valuations leave little room for error; any disappointment in earnings could trigger a market correction.
Investors are thus poised on a knife-edge, with hopes pinned on a robust earnings recovery in the second half of 2024. This period is set to be a decisive test for the market’s current buoyancy, determining whether the optimism that has fueled this year’s rally is well-founded or if a recalibration is imminent. The forthcoming months are critical, with the potential to affirm the market’s resilience or expose vulnerabilities that could lead to a retreat in stock prices.