FIGURE 2: S&P Operating Margins and Index Prices
While technicals may make for a choppier market in the short run, the outlook for an earnings recovery continues to improve, with all components of our profit checklist—cycle, revisions, margins, breadth— now offering firm support as stocks climb to all-time highs. The earnings slump appears to have ended in Q2 of 2023. Historically, the index has re- turned 5.1% in the four quar- ters following such a trough, and conservative analyst fore- casts may set low hurdles for companies to beat. Margins in particular have become a strong tailwind for equities and will likely contin- ue to support risk tolerance as long as inflation trends lower. The consensus operating mar- gin for S&P 500 companies is a leading indicator of stock-price direction and moves counter to inflation pressures. Ex-energy profitability has been improving for a year, but S&P 500 operating margins are finally expected to lift off the lows from Q4 of 2023 reported in Q1 of 2024, and are expected to improve for much of 2024. Consensus expects all S&P 500 sectors will post operating margin growth in 2024 vs. 2023. (See FIGURE 2.) Cyclical-sector earnings growth relative to defensive sectors should improve considerably through 2024 as well, boosting confidence in the cycle. Cyclicals lost ground to defensives
1 2 SPRING 2 0 24 ■ IR UPDAT E
FIGURE 3: Cyclicals and Defensives Growth Compared to S&P Index Prices
throughout 2022, helping explain stocks’ ebbing momentum, with the latter taking the lead in Q1 of 2023 and maintaining it since. They’re likely to surrender that in Q2, with consensus expect- ing cyclical earnings to pull ahead of defensives by an average of 383 basis points in the second half of 2024. (See FIGURE 3.) The economy’s on-again, off-again flirtation with recession,
particularly without a normal employment cycle, has created a tumultuous landscape for stocks over the past two years, but the indicators that matter most all suggest the economy is gener- ally gaining some momentum from recent lows in Q4 of 2023.
niri.org/ irupdate
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