Why Earnings Growth Will Matter as the Market Melts Up Further
Data from FactSet puts 1Q 2024 EPS growth at 3.4% year over year
US equity futures point to a positive market open later this morning as stocks look to rebound from yesterday’s move lower. Despite that modest setback, with three days left in March, the major US market benchmarks are tracking for their fifth consecutive win. With modest pieces of economic data out today, quarterly results from just McCormick & Co.(MKC), and UPS’s (UPS) Investors Conference, but no talking Fed heads, today fits the “quiet week” profile ahead of US stock markets being closed this Friday. That lack of bad if not sobering news, likely means a continued melt-up in the market even as it once again flirts with being overbought.
As we approach the Easter weekend and companies close their 1Q 2024 books, our eyes and ears will turn to March quarter earnings pre-announcements, good or bad, but we will also be watching for fresh signs for consumer spending, corporate cost-cutting, and AI-related investments. What we and others will be looking to gauge is whether 1Q 2024 earnings growth will repeat their 4Q 2023 upside surprise.
As of now, data from FactSet puts 1Q 2024 EPS growth at 3.4% year over year, potentially the third straight quarter of EPS growth on that basis. Given the current P/E multiple of 21.4x consensus 2024 EPS for the S&P 500 that is already expected to rise more than 10% compared to 2023. With that multiple knocking on the door of recent highs established in the last few years, further upside for that market benchmark will be tied more to stronger-than-expected EPS growth than multiple expansion.
Model Musings
EPS Diplomats
“S&P 500 Q4 ’23 earnings were supposed to grow 4% as of early January ’24, and instead wound up +10.1% as of this week. That’s a healthy upside surprise and that upside will likely temper some going forward, but don’t look a gift horse in the mouth.” Read more here
“Earnings growth expectations have been lifted to 11% for the S&P 500 index for 2024, while the earnings outlook for S&P 500 tech is up even higher.” Read more here
EV Transition
“More so than China and Europe, the US faces a specific challenge in overcoming a culture of ICE dependence, driven largely by relatively low fuel prices and the preference among consumers for large vehicles,” per JATO’s report. “Due to higher BEV retail prices and the comparatively low cost of running an ICE vehicle in the US, there is currently no strong financial incentive to encourage consumers to make the switch to electric.” Read more here
“In a sobering revelation from a Boston Consulting Group study, the vast majority of potential EV adopters want three things to happen before they’ll seriously consider switching from gas to EV — they want under 20-minute charging times, a 350-mile plus driving range and a sticker price of under $50,000. With only one EV — the Hyundai Ioniq 6 SE RWD Long Range — meeting those criteria, the industry has a long way to go.” Read more here
Safety & Security
“Congress early on Saturday passed the fiscal 2024 defense spending bill, nearly halfway through the fiscal year that began in October… The bill includes $33.5 billion to build eight ships and allocates funds for 86 F-35 and 24 F-15EX fighter jets as well as 15 KC-46A tankers. There’s also a combined $2.1 billion for the Army’s Long-Range Hypersonic Weapon and the Navy’s Conventional Prompt Strike hypersonic weapon system. It also funds multiyear contracts to procure six critical munitions: the Naval Strike Missile, the Guided Multiple Launch Rocket System, the Patriot Advanced Capability-3, the Long Range Anti-Ship Missile, the Joint Air-to-Surface Standoff Missile and the Advanced Medium-Range Air-to-Air Missile.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The strategies behind our Dividend Income Models:
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.