Beyond The Earnings Headlines: Keep Your Eye On Sentiment
The US Q4 2023 earnings season is currently underway. In spite of depressed business confidence abroad and ongoing recession fears, we see US corporate sentiment - as reflected in company transcripts - continue to improve. Prospects for full-year 2024 remain solid amid expectations of a stronger than expected US economy.
Earnings growth has been on an improving trajectory, turning positive year-over-year in Q3 2023 after several quarters of declines. Expectations for full-year 2023, which were cut down during H1 to around 1.5% mid-year, were steadily bumped higher to around 3% by the end of the year.
Our corporate sentiment indicator, a diffusion measure of company management sentiment measured from earnings transcripts using natural language processing, fell below its historical average and bottomed out in early 2023.
But with corporate sentiment rising steadily ever since, where are we now?
The chart below shows sentiment and earnings expectations relative to their trailing twelve-month averages. It paints an interesting picture. Transcript sentiment seems to have done a great job forecasting the drop in earnings expectations at the end of 2021, as well as their plateau in late 2022. Looking forward it seems that, as optimistic as earnings expectations have become, transcript sentiment is even more so. Sentiment is exhibiting one of its largest positive changes relative to the trailing twelve months we have seen absent the immediate post-COVID period.
Meanwhile, how is the current earnings season shaping up?
Forecasts for Q4 2023 have been guided lower over the past several months. While typical downward revision for a quarter in the three months prior to the start of the earnings season are around -3% to -4%, Q4 expectations saw a much sharper reduction by around -7%. The number of negative to positive pre-announcements, while not as high as in 2019, were still higher than historical average at 1.9X. Thus, the bar for the quarter has been set low enough for companies to post a modest beat.
For 2024, consensus expectations are for a solid low double-digit growth. This optimism stems from many industries already experiencing an earnings recession and tightening spending, potentially setting the stage for margin improvement as economic conditions stabilize. Further, labor productivity has accelerated in recent quarters.
While projections for the current earnings season were revised sharply lower, as noted above, expectations for full year 2024 are still holding up well. At this stage, full-year earnings for current year would have been revised lower by around -4.5% since the previous June. However, 2024 expectations have been discounted by just around -1.5% thus far.
Should expectations be revised lower due to a slower economy impacting sales, consistent with historical patterns of downward revisions as the year progresses, earnings growth could still turn out moderate. In the coming weeks, the evolution of corporate sentiment might provide some valuable clues to what we can expect for earnings in the upcoming quarters.