This Measure Has Barely Moved All Year. Here’s What It Means For Stocks

This Measure Has Barely Moved All Year. Here’s What It Means For Stocks
Reda Farran, CFA

2 months ago2 mins

Here’s a chart that actually might surprise you. Despite all the highs and lows and wild developments in US financial markets and the economy this year, 2024 profit expectations held remarkably static. Analysts are projecting that S&P 500 companies will earn around $247 per share in 2024 – a figure that’s barely changed since the start of May. And that’s despite the fact that the index has risen 14% since then, as the market overcame fears about a banking crisis, ever-rising inflation, higher borrowing costs, and a seemingly imminent recession. Through all of that, analysts’ 2024 earnings projections stuck to a tight range, drifting between $243 and $248 a share.

A lot of those risks have now receded, sure, but as stocks rallied and those earnings estimates held steady, valuations went from reasonable to fairly rich. The S&P 500 is currently trading at 19.6x projected earnings – that’s 24% above its 20-year average. The Nasdaq 100, which is of course full of tech stocks with lofty valuations, is even more expensive: it’s currently priced at about 25x projected profits. That’s down from its peak of 30x in 2020, but it’s well above the average of 19x over the past two decades.

The good news is that next year’s profit expectations look more realistic than they did back in May. Companies posted decent results last quarter and the Federal Reserve is talking more seriously about a soft landing (that dream scenario where the economy slows enough to tame inflation, but remains strong enough to avoid a recession). Slowing economic growth has already led to an earnings decline that was long but relatively shallow for S&P 500 companies, with a 13% peak-to-trough contraction in trailing 12-month earnings per share in 2022 and 2023. However, if current analyst predictions hold true, earnings could well rebound with an anticipated 11% growth in 2024.



All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG