Why US earnings may easily beat expectations

Morgan Stanley analyst says forecasts have set the stage for surprises.

Slashed earnings estimates are creating the optimal platform for US companies to beat expectations this earnings season, according to Morgan Stanley’s Michael Wilson.

Analysts’ consensus estimate for fourth-quarter results has dropped 7% over the past three months, with earnings growth now expected to be flat compared to the year before, a team of strategists led by Wilson wrote in a note on Tuesday.

“This downward revision creates a lowered bar into the quarter, which likely leads to another mid-single-digit earnings-per-share beat rate,” he said.

Investors are closely monitoring the early stages of the earnings season to assess how companies have dealt with high interest rates and to gauge the health of US consumers. Stocks comprising only 8% of the S&P 500’s market capitalization have reported so far, with the majority of these firms surprising positively, according to data compiled by Bloomberg Intelligence.

Strategists at Societe Generale SA said a deterioration of US earnings-per-share estimates in the build-up to the reporting season is common to allow companies to surprise positively. Still, the team led by Andrew Lapthorne said the three-month moving average of earnings upgrades compared to the overall number of estimate changes has actually moved higher, indicating an improving growth outlook.

Wilson — who was bearish last year even as stocks rallied — warned that despite strong beat rates, price reaction have been “more muted” over the past several quarters.

Health care, technology and communication services are among the sectors that will see the highest earnings growth in 2024, said Wilson, who was picked as the best portfolio strategist in an Institutional Investor survey last year.

Overall for 2024, analysts expect S&P 500 earnings to climb nearly 11%, according to data compiled by BI.