S&P 500 (SPX) lost 1.5% in the first trading week of 2024, this way ending the streak of nine consecutive weekly gains since late October. The rally ended near the 4800 with the bulls failing to post a new record high. Still, the SPX is just 2.1% away from its previous all-time high recorded on Jan. 3, 2022.
Dow Jones Industrial Average (DJI) lost 0.6% but it remains close to the record highs set in the final week of December. Finally, the Nasdaq Composite Index (IXIC) dropped as much as 3.3%, marking the biggest weekly fall since September.
Equity markets have started this year on a rocky note as investors opted to take profit following a massive rally in the last two months of 2023, and ahead of the Q4 earnings season that starts later this week.
“Equity markets are now showing overbought conditions, with sentiment moving into complacent territory,” analysts at JPMorgan wrote in a note.
For this weak, investors will be focused on the CPI print for December, which is due out on Thursday. Moreover, the PPI data is expected to be released on Friday.
“[These] prints may be market-moving as the bond market tries to determine the timing of the first rate cut among March, May, and June,” analysts at JPMorgan said in a note on Monday.
Q4 earnings season is set to start
According to FactSet, the S&P 500 is anticipated to experience a year-over-year earnings growth rate of 1.3% for the fourth quarter of 2023. If this estimate holds, it will mark the second consecutive quarter of positive YoY earnings growth for the index.
Analysts at FactSet also took note of a significant downward revision in the earnings growth rate, as the estimated growth rate on September 30 was notably higher at 8%.
The Q4 earnings season arrives as the forward 12-month price-to-earnings (P/E) ratio for the S&P 500 stands at 19.2. This is above both the 5-year average of 18.9 and the 10-year average of 17.6, indicating a relatively higher valuation compared to historical norms.
The list of major companies that report this week includes Albertsons (Tue), KB Home (Wed), Taiwan Semi and Infosys (Thu), as well as JPMorgan, UnitedHealth, Bank of America, Wells Fargo, Citigroup, BlackRock, and Delta Air Lines – all set to report on Friday.
“The bar ahead of 4Q results is higher than in recent quarters, but we expect S&P 500 firms in aggregate will beat analyst forecasts. Consensus expects 90 bp of sequential margin contraction, which appears too pessimistic,” analysts at Goldman Sachs wrote in a note.
“Despite lower oil prices, we see potential upside to our EPS estimate from stronger US economic growth, lower interest rates, and a weaker USD.”
What analysts are saying about US stocks
Analysts at Oppenheimer: “Our expectations are for the market to remain data-dependent until Q4 earnings season begins on Friday when the big banks start reporting results.”
Analysts at JPMorgan: “While a year ago risky assets were fully pricing in a recession, and economists unanimously agreed with that, now the picture is quite different, recession probabilities are currently near the lows of the range, and most macro forecasts are hopeful. This might be too optimistic.”
Analysts at RBC: “Though we are concerned that the weakness we’ve seen in the S&P 500 so far in 2024 hasn’t fully played out, we remain constructive on the S&P 500 in the year ahead. Today, we are revising up our YE 2024 S&P 500 price target to 5,150 from 5,000.”
Analysts at Morgan Stanley: “The majority of market participants and macro forecasters are in the soft landing camp for 2024—i.e., muted real GDP growth, falling inflation and more accommodative monetary policy from the Fed. Given this expectation, many investors still favor large cap quality and growth stocks and are looking to buy these cohorts on short-term weakness.”
Analysts at Evercore ISI: “EVR ISI Strategy forecasts a Full Circle year as 2024 EPS will show little change vs. 2023, or 2022. Stockpicking remains critical as correlations hover near PrePandemic troughs and where early reports have had sizeable moves.”