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High investor expectations shape the market situation

INVESTINGHigh investor expectations shape the market situation

The season for companies to publish their results for the 4th quarter is ongoing worldwide. In the USA, 70% of companies have exceeded forecasts, but the earnings rebound is weaker than in the previous quarter. In Europe, about half of the companies have beaten the forecasts. The market’s initial reaction to Alphabet and Microsoft’s results shows that sometimes even good results may not meet high market expectations.

In the USA, half of the companies from the S&P500 index have reported their results for the 4th quarter of 2023. Over 70% of them have exceeded already significantly reduced market analyst forecasts. All sectors also beat these forecasts, led by energy and healthcare. Company revenues rose by 3%, and earnings by 6%. Excluding the energy sector, earnings increased by even 10%. Among the companies were those that disappointed the market like Tesla or Intel. But there were also those with very attractive growth like Meta, Amazon, and Netflix. Meta’s shares, the owner of Facebook and Instagram, thanks to very good results, increased by almost 33% since the beginning of the year.

However, one cannot consider the results of companies independently of investor expectations. Both Alphabet and Microsoft experienced this, whose shares lost value despite the rise in profits. The bar for tech and AI-related companies is currently set high. The profits of the “Magnificent Seven” – the seven biggest tech companies: Nvidia, Tesla, Meta, Apple, Amazon, Microsoft, Alphabet – soared by over 50% compared to a drop in profit of the remaining 493 companies from the S&P500 index by 10%. The energy sector reported the biggest drop in profits.

The situation in Europe is worse than the USA. The ratio of companies beating forecasts is always lower because fewer companies provide forecasts. Currently, about 50% of companies in Europe have surpassed earnings forecasts, which is under average. European companies’ results are lower due to a weaker economy, higher debt, and lower margins. Company turnovers fell by around 3%, and earnings by 9%. The largest companies such as French LVMH and Dutch ASML achieved good results. On the other hand, European banks from BNP Paribas to ING presented the weakest results.

The bullish scenario for the stock market in 2024 is currently based on two pillars: lower interest rates and improving earnings. Both of these factors have recently encountered unexpected obstacles. The FED is delaying making the first interest rate cut. Fourth-quarter earnings turned out to be slightly weaker than expected, prompting a halt in the expected improvement in earnings. Remember, however, that both of these factors will become more critical in the second half of the year than in the first. By then, central banks will start cutting rates, and earnings will return to double-digit growth. For now, exchanges are being driven by expectations regarding this scenario’s implementation.

The growth of companies’ earnings in the following quarters will be aided by a soft landing of the economy in the USA and a recovery in Europe, as well as a low base from the last year’s “earnings recession” in the USA and emerging trends in artificial intelligence. Lower inflation is reducing pressure on margin levels. European profits are currently the most lowered and cyclically should bounce back the strongest.

Paweł Majtkowski, eToro’s analyst in Poland

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