Interactive Investor

American stocks preparing for a profits boom

After a largely positive results season, we’re told the earnings recession for US companies is over as margins recover. Here’s what’s driving the improvement.

7th November 2023 15:34

by Graeme Evans from interactive investor

Share on

The earnings recession for major US companies already appears to be over after the current results season showed a return to profit growth.

Strong performances by some of the “Magnificent Seven” mega-caps, the support of a resilient labour market for consumer spending, and a near end to the slowdown in the goods segment of the US economy are among factors driving the improvement.

About 85% of the S&P 500 index has so far reported quarterly figures, with the better-than-expected results of Amazon (NASDAQ:AMZN) and Microsoft Corp (NASDAQ:MSFT) among the highlights. Stocks still to update include The Walt Disney Co (NYSE:DIS) after the closing bell on Wednesday, followed by Walmart Inc (NYSE:WMT) on 16 November and the semiconductor giant NVIDIA Corp (NASDAQ:NVDA) on 21 November.

The performances so far point to better-than-expected year-on-year growth in earnings per share (EPS) of around 4%, the first positive quarter in a year. They also indicate a 4% beat versus the Wall Street consensus, which is double the typical rate.

Excluding energy companies after their results were hit by lower oil prices, Bank of America notes that earnings would have been 10% higher. This is largely due to the support of mega-cap tech stocks, although even without the Magnificent Seven earnings still beat by 3%.

The bank’s analysts said this week: “The economy is cooling, but companies have had their earnings recession, have cut costs, and are now enjoying margin expansion.

“Demand concerns loom but EPS growth of 4% on 2% lower real sales indicates that profits have troughed at least for now and that even a small demand recovery could boost earnings from here.”

History suggests earnings typically recover stronger than they fall because downturns remove excess capacity, resulting in a leaner cost structure and improved margin profiles.

From correction territory after falling more than 10% from the summer high, the S&P 500 index has rebounded in recent sessions on signs that interest rates look to have peaked.

Despite the fastest hiking cycle in over 40 years, Bank of America believes the impact on S&P 500 earnings will be manageable given that over 75% of debt is long-term fixed. The debt maturity schedule for the S&P 500 is also more spread out.

It sees the main risk in the small-cap Russell 2000, where only 60% is long-term fixed and the debt maturity schedule is much more front-loaded. These concerns were highlighted in yesterday’s trading when the Russell 2000 fell 1.3% in an otherwise flat Wall Street session.

UBS said this week it believes a soft-ish landing for the US economy appears achievable and that this would support its expectations for 9% S&P 500 EPS growth next year.

The bank added: “The state of the consumer continues to be a key focus for investors and, in our view, spending remains fine.

“Credit card companies — a good read on spending as they touch so many consumer segments — suggested growth rates are consistent with earlier this year, and given the cooling but healthy labour market, we believe consumer spending should hold up.”

UBS has maintained its June and December 2024 S&P 500 price targets of 4,500 and 4,700 respectively, which compares with today’s starting level of 4,365.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Get more news and expert articles direct to your inbox