Markets are normally overly optimistic coming into a new year. This year, however, US economic and earnings expectations were unusually less hopeful versus fairly positive outturns.
That will make gains from here not as easy, as it will be harder for results to keep beating ever loftier expectations.
Perhaps not surprisingly for anyone who’s been involved in markets for long enough, they tend to get carried away at the start of the year. That applies to economists too. On average, economic surprise indices fall in the first months of the year, as the data fails to match up to heightened anticipations.
Unlike the average monthly change in economic surprises at the start of the year, though, this year has seen them rise (based on Citi’s indices).
That takes into account that expectations were already fairly upbeat coming into 2024. More and more investors had taken a US recession out of their central view, according to BofA’s January Global Fund Manager Survey.
Earnings estimates also tend to be afflicted by early-year boosterism, but these too have been surprising to the upside among many key companies.
About three-quarters of S&P 500 companies have beaten EPS estimates for 4Q23, while earnings estimates were continually marked up through the latest earnings season.
There were some high-profile beats, including Meta and Amazon, and most significantly Nvidia, who blew expectations out of the water, reporting a 22% increase in revenues and 33% increase in earnings q/q, along with some very bullish future guidance that is open to disappointment.
Markets have enjoyed the tailwind from economic and earnings expectations being exceeded. The S&P is up ~6.7% year-to-date versus the seasonal average of 1% (to end of February, with data going back to 1980).
That means further equity gains will become more of a grind as results need to deliver more and more to surprise to the upside, with the ongoing risk of what some actual bad news would almost do certainly to prices.
