With 80% of S&P companies having reported, 4Q earnings were much stronger than expected. 80% of the S&P companies have beat estimates and y/y index EPS growth is up to +7%. That is a 5.2% intra-quarter earnings revision that will leave full year 2023 earnings around $217. A higher starting point for 2024 and slightly lower estimates for FY24 EPS has lowered the growth bar stocks need to clear.
Macro headwinds reduced the immediate value of strong earnings beats. During the earnings season, implied equity and bond volatility increased, overshadowing the impact of releases on performance. Companies that beat analyst estimates were rewarded less than normal this past season, particularly within the large cap space. For all size segments, names that missed earnings were punished MUCH more than normal this quarter. Expect some catchup by positive earnings surprise companies over the next week or so.
One of the baskets we favored during earnings season is the Beat Swap (MS22BEAT Index), which is long high Quality Earnings and positive earnings sentiment names. The basket posted a higher beat rate (86%) than the S&P (80%). We list the S&P names meeting the Beat Index criteria that report this week in the report.
MS22INEX Index, another tradable Swap for earnings, goes long S&P names with increasing/stable internal earnings sentiment and negative external (macro) sentiment readings. The short basket is the opposite (negative internals, flat to positive external). The long basket had a higher beat than both S&P and the short side. The names in the basket reporting this week are listed at the end of this report.
Strong 4Q Earnings, Lower Rewards, and Expectations of a Catchup: 4Q earnings season is expected to end stronger than expected with 80% of reported S&P names beating estimates. Consensus quarterly earnings are now at $57.30, 5.2% higher than the start of the reporting 5 weeks ago. Full year 2023 estimates have been revised up to just under $217 as well. The distribution of earnings beats was broad with modestly higher than normal beat rates across surprise tranches. Strong earnings are consistent with better economic growth in 4Q and early 1Q24.
Strong earnings help explain why the VIX remains in the low teens and why the S&P PE is hovering around 20x despite increased macro uncertainty. However, the excess returns to earnings surprises were lower than normal across beat rates…
…and that held across market cap segments. Mid and small cap names had slightly better than normal returns to beats, but misses were much more severely punished. Avoiding misses remains VERY important during reporting season. Also, with macro headwinds fading, we expect to see some catchup in the performance of names that beat earnings but got swept up in market moves tied to policy uncertainty (FOMC, CPI, etc.,).
Excess return dispersion was elevated around the earnings release. As a result, positioning for earnings surprises was more volatile than usual. Again, part of the reason can be explained by macro and policy uncertainty.
In addition to reported earnings, S&P EPS and sales guidance improved sharply. Net negative guidance plunged during reporting. The level of negative sales guidance remains high, but managements’ sentiment towards earnings improved both internally and externally. These are all signals that 4Q reporting will end strong and suggest an upward bias to fundamentals from here.
Earnings Season Indices: One of the baskets we favored during earnings season is the Beat Swap (MS22BEAT Index), which contains S&P names with high Quality Earnings and positive earnings sentiment scores. The names meeting those criteria posted an 86% beat rate (~6pp better than the overall index). The short side of that index (low quality earnings with negative sentiment) posted a VERY weak 60% earnings beat rate. The returns to the basket were hampered by the weakness in returns to positive surprises.
Below are the S&P names reporting this week that meet the long criteria.
ahead of 4Q, to benefit from a macro recovery, we also created a basket of stocks with falling external earnings sentiment (macro influenced) and stable/positive internal earnings sentiment (Swap: MS22INEX Index). The long side of the basket posted an 84.4% beat percent, higher than both the S&P and the short (positive external, negative internal) sentiment basket. We are looking for some catchup in positive earnings surprise names over the coming weeks as macro headwinds fade and investors refocus on fundamental trends.
The S&P names that fall in the basket reporting this week are listed below.
