Earnings Edge: S&P 500 Firms Maintain Strength

Despite escalating recession apprehensions and recent bearish market movements, the steadfastness of S&P 500 earnings endures, as articulated by Citi strategists in a Wednesday dispatch.
Citi’s Economic Data Change index, encapsulating US macroeconomic trends, portends further economic degradation. The index’s trajectory hints at a reading of -500, indicative of recessionary conditions, should current trends persist, Citi noted.
Intriguingly, even amidst the economic frailty of 2022, S&P 500 earnings growth remained unperturbed, with earnings recessions in specific sectors cushioning the broader index from pronounced declines.
The strategists uphold their $250 EPS projection for the S&P 500 in 2024, marginally surpassing the prevailing bottom-up consensus of approximately $243.
“However, this earnings level, or even a slightly diminished one, would still signify a notable enhancement over 2023,” the strategists contended.
“Although not guaranteed, with Q2 reports largely concluded and most corporates midway through Q3, it seems unlikely that earnings projections will deviate significantly from the current consensus.”
The strategists caution that more pronounced macroeconomic deceleration in the remainder of the year could impact 2025 earnings. Nonetheless, they anticipate greater resilience compared to historical trends.
Productivity gains and enduring secular trends underpin expectations for high-single to low-double-digit EPS growth in 2024. The recent market correction has allayed some valuation concerns, reinforcing these projections.
“Consequently, we advise investors to fortify positions in fundamentally sound names.”
They advocate for a “growth is defensive” stock selection strategy, suggesting the identification of equities now more attractively priced relative to expectations. While repositioning portfolios defensively may be wise in anticipation of a severe recession, this remains an unlikely scenario. Traditional valuations have moderated with the market pullback, and their valuation composite has dipped below the 80th percentile. Importantly, market-implied growth expectations have tempered, especially for growth stocks, fostering a more balanced outlook moving forward.