Weekly Investment Commentary: Earnings season: investment ideas
Bottom line up top:
- It’s still early in the U.S. corporate earnings reporting season, but so far the overall tone remains positive. Analysts currently forecast earnings per share (EPS) growth of 0.9% for the first quarter, according to FactSet. For 2024 as a whole, analyst estimates call for EPS to grow 11.0%, improving to 13.4% in 2025.
We see caveats to this optimism in the macroeconomic backdrop:
Escalating geopolitical tensions: Stocks sank at the end of the week and yields rose as fears of a worsening and spreading conflict in the Middle East intensified. Oil prices also spiked as part of the broader risk-off move. Should the situation worsen, we would expect these trends to accelerate.
A potentially weaker U.S. consumer: Recent retail sales figures have been disappointing, while consumer credit defaults are rising.
Higher-for-even-longer interest rates: On the heels of another hot inflation print last week, Federal Reserve rate cuts in 2024 may be further away and fewer in number than markets anticipated as recently as the end of March. The extended pause poses a risk to earnings growth as elevated interest rates cut into spending by both consumers and businesses. A slower trajectory for earnings, whether feared or realized, could hamper equity market performance.
On balance, our asset allocation outlook remains neutral with respect to equities overall. Moving from cautious to higher-conviction optimism would depend on a number of potential catalysts coming to fruition:
- A sense that geopolitics won’t trigger a broader and more extended risk-off move.
- Earnings growth, rather than multiple expansion, as the driver of market gains.
- Further improvements in earnings growth and positive earnings revisions
- Increasing market breadth
"Higher interest rates could create a risk for corporate earnings — and for equity prices.”
Portfolio considerations
First-quarter earnings season has kicked off with the utilities and communication services sectors projected to deliver the strongest year-over-year EPS growth, while estimates for materials and energy are expected to decline the most. Our contrarian view, informed by fundamentals, ongoing geopolitical tensions and recent surprises in economic data, finds materials and energy attractive.
Manufacturing activity in the U.S. unexpectedly rebounded in March, with a sharp increase in production and overall demand based on the ISM Purchasing Managers Index (Figure 2). This suggests that the manufacturing sector — which had been contracting since September 2022 — has likely bottomed and could strengthen further in the coming months. The materials sector has historically performed well when PMIs have troughed and returned to expansion territory.
Global PMI readings also offer encouraging news: For the first time in two years, the global new orders/inventory ratio recently broke above 1x, a level that is typically a favorable leading indicator of chemical volumes. U.S. chemical shipments have been positive over the past couple of years, while improved Chinese demand for chemicals during the first quarter could be another tailwind.
Geopolitical tensions, most notably fears that the conflict in the Middle East could escalate into a broader regional war as well as the effects of the protracted Russia-Ukraine war, have driven energy prices higher. Crude oil prices are up sharply, and continuing production cuts by OPEC+ nations are keeping global supply tight. That said, higher oil prices could benefit the energy sector by generating higher free cash flow growth. Last week’s release of U.S. CPI data for March, confirming that inflation will likely remain elevated for some time, also augurs well for the energy sector, historically one of the best performers when inflation is high.
In contrast, we remain cautious about the consumer discretionary sector. Although the resilient U.S. economy continues to defy expectations, any material changes to employment warrant close monitoring. Additionally, a recent report from the New York Federal Reserve showed that higher-for-longer interest rates and inflation are causing anxiety for consumers, with one in eight (the most in four years) expected to miss an upcoming minimum debt payment.
"Despite negative predictions for earnings growth in materials and energy, we think both sectors look attractive.”
Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer:
- macro and asset class views that gain consensus among our investors
- insights from thematic “deep dive” discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
- guidance on how to turn our insights into action via regular commentary and communications
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
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