Corporate Earnings Drive US Stocks
Corporate earnings are becoming a major force behind US stocks as investor attention shifts back to economic growth following Donald Trump’s US presidential election victory. With the third-quarter reporting season nearly complete, S&P 500 companies have reported an 8.4% profit increase—double the anticipated growth, as per Bloomberg Intelligence data.
Optimistic Projections for 2024
Wall Street’s outlook for 2024 is even more positive, with analysts predicting a 13% earnings increase—the largest since 2021, according to Bloomberg Intelligence. Strategists at Goldman Sachs Group Inc. see this as a promising sign for US stocks, particularly as the Federal Reserve maintains a balanced stance on growth and inflation.
Primary Driver of Stock Returns
“We expect earnings will be the primary driver of forward equity returns,” wrote Goldman Sachs strategist David Kostin in a note dated Nov. 8. This perspective aligns with the optimism surrounding US-centric investment strategies, which have boosted the S&P 500 to record highs amid expectations of pro-growth policies under Trump.
America-First Policies and Economic Impact
The “America-first” trade—favoring assets that benefit from US outperformance—has pushed the S&P 500 to new heights. This surge is driven by hopes that Trump’s policies will bolster economic growth and shield the US economy from global competition. Additionally, the Federal Reserve’s decision to cut interest rates, paired with its acknowledgment of inflation progress, has further supported market sentiment.
Investor Concerns over Tariffs and Inflation
Despite the optimism, Trump’s proposal to impose a 10% to 20% tariff on all imported goods poses a significant concern for investors. This move risks sparking retaliatory measures and curbing consumer spending, potentially fueling inflation. The S&P 500’s impressive 26% gain this year—poised to be the biggest since 2021—has also led some market watchers to caution that valuations may be overextended.
Earnings Revisions Normalizing
Since September, consistent earnings downgrades have added to worries about next year’s forecasts. However, Goldman’s Kostin noted that these revisions are beginning to normalize after an unusually strong period in early 2024. He estimates that each 1% reduction in the domestic tax rate could boost S&P 500 earnings per share by just under 1%, while deregulation may provide further support. However, potential tariffs could pressure profits.
Caution Amid Positivity
Lori Calvasina, strategist at RBC Capital Markets LLC, highlighted a potential stock decline in the coming weeks due to limited capacity to handle negative news. “Election uncertainty has dissipated, and US equities are feeling optimistic over the direction of government policy,” Calvasina wrote. “However, we see short-term pullback risks based on our positioning and valuation data. We’re preparing for a more dynamic environment that will demand greater agility in trading throughout next year.”
US Stocks: A Balancing Act of Optimism and Risks
US stocks are riding high on strong corporate earnings and a hopeful outlook for 2024, fueled by pro-growth policies and Federal Reserve support. However, concerns over potential tariffs, inflation, and stretched valuations highlight the need for cautious optimism as markets navigate this dynamic environment.