Friday’s labor market report and this week’s NFIB Small Business Optimism Index remain consistent with further economic growth as we start 2024.

Highlights for this week include:

  • Friday’s labor market report and this week’s NFIB Small Business Optimism Index remain consistent with further economic growth as we start 2024.
  • Fourth quarter (4Q) earnings season kicks off on Friday, with S&P 500 earnings growth expected to be positive for the first time since 3Q of 2022. Companies benefitted from better-than-expected economic growth and subsiding input cost pressures throughout 2023, and this should continue to be reflected in 4Q results. Profit growth provides the ultimate support for stocks, and we also remain encouraged by healthy stock market internals.

Recent Economic Readings Consistent with Further Growth

Last Friday’s labor market report showed 2023 ended with the labor market on solid footing, with nonfarm payrolls expanding by 216,000 and the unemployment rate remaining at 3.7% in December. However, average hourly earnings came in higher than expected at 4.1% y/y. Although payroll growth slowed in 2023, the labor market remains tight, and wage growth is inconsistent, with inflation quickly coming back to the Federal Reserve’s (Fed’s) 2.0% target. While this suggests the Fed will remain vigilant with high interest rates, job and wage growth are key drivers of economic activity, and this payroll report is consistent with further economic growth.

In other recent economic readings, the NFIB Small Business Optimism Index saw its first increase in five months in December. It matched the highest level since September 2022, as business owners expressed more optimism about sales growth and the economy. Although the index remains well below its historical average, it is up 2.3% from a year ago which, combined with the improvement at year-end, is a tailwind for the broad economy as we begin 2024.

Expectations for the Upcoming Earnings Season

The fourth quarter (4Q) 2023 earnings season kicks off on Friday with the major banks reporting. Important insights are gained from these institutions that touch all aspects of the economy, and we watch their results and comments closely. The consensus expects 4Q profits for the aggregate S&P 500 index to grow by 3% year/year.

Analysts have not entered a quarterly reporting season with positive S&P 500 earnings growth expectations since 3Q22. This creates a higher bar for positive surprises compared with recent quarters (-7% ahead of 1Q, -9% in 2Q, 0% in 3Q) when results came in much better than expected (by 4% on average). However, companies benefitted from better-than-expected economic growth and subsiding input cost pressures throughout 2023, and this should continue to be reflected in 4Q results.

At the sector level, Utilities (+47%) is expected to post the strongest y/y earnings growth, while Energy (-28%) is expected to post the largest decline. Consensus is also optimistic on “mega-cap tech” sectors: Communication Services (+36%), Consumer Discretionary (+22%), and Info Tech (+16%). In contrast, analysts forecast declines in Materials (-22%) and Health Care (-21%). Energy and Materials are being impacted by lower commodity prices, while Health Care faces tough comparisons due to the end of the pandemic.

Looking at 2024, S&P 500 earnings revisions are tracking better than 2023, and the historical average with the consensus now calling for 11% earnings growth in 2024.

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