Equity Strategy: Q4 Preview - the downtrend in earnings momentum is not changing

Speaker: Mislav Matejka, CFA - Head of Global Equity Strategy

For Q4 results, the activity momentum has generally decelerated in the quarter, which calls for a sequential weakness in earnings delivery. The good news is that the hurdle rate has come down aggressively, for S&P500 from 10% to only 2% yoy. Given this, the actual results are likely to yet again beat the much lowered estimates. The problem is that the market really needs some net earnings upgrades to advance from current levels, not just the beats vs heavily lowered projections, in our view. This is because the sentiment and positioning is stretched, valuation multiples have rerated, and the key driver of the Q4 rally, the move lower in bond yields, is likely over for the time being. Big picture, 2024 EPS projections keep coming down, in most regions. This is unlikely to change, we see risks to both pricing and to volumes for this year, in addition to what is generally a tough hurdle rate for most corporates - profit margins are elevated vs typical. At subsector level, Semis, Autos and Banks margins are at record highs, and could weaken. Chemicals margins are subdued, but we fear they could stay weak - we keep our long held UW view on the Chemicals sector. In aggregate, COVID distortions appear to have benefited Cyclicals more than the Defensives, and this is where the unwind could happen. We stay OW Growth vs Value, continuing last year’s style preference, keep OW US vs Eurozone, and believe that Defensives are set to perform better this year.

This podcast was recorded on 21 January 2024.

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