By Paul R. La Monica
April 12, 2024
FOMO, or the “fear of missing out,” is a well-known social-media phenomenon. Now, one investment strategist says she is OMO—“OK missing out”—when it comes to this year’s stock market rally because she’s nervous about earnings and how high prices have gotten.
“I wouldn’t be taking as big of a risk because of valuations,” says Julie Biel, chief market strategist at Kayne Anderson Rudnick, an investment firm with nearly $60 billion in assets under management. “It’s terrifying how narrow the rally has been.”
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Stocks had a tough week, with the S&P 500 index dropping about 1% and the Dow Jones Industrial Average down nearly 2% following the hotter-than-hoped-for consumer inflation report released on Wednesday. Valuations, though, still look stretched—the S&P 500 is trading for more than 21 times 2024 earnings estimates, above its average for the past five and 10 years, after gaining 8% this year.
“You need growth to surprise to the upside,” Biel says. “If not, high multiples can get compressed, and that can happen quickly. Investors will run for the exits.”
And growth is what corporations need to deliver when they report first-quarter earnings and guidance for the rest of the year.
Several big financials kicked off the profit parade with mixed results on Friday. Wells Fargo and Citigroup shares had muted moves, but JPMorgan Chase fell as CEO Jamie Dimon warned that “the global landscape is unsettling” and that “persistent inflationary pressures...may likely continue.” Goldman Sachs Group, Bank of America, and Morgan Stanley report this coming week. So do IBM and Taiwan Semiconductor, Johnson & Johnson, and UnitedHealth Group as well as United Airlines, CSX, Procter & Gamble, and Netflix.
Analysts are expecting profit growth of just 3.6% for companies in the S&P 500 for the first quarter, according to FactSet. And that’s being driven largely by tech—think Nvidia, Super Micro Computer, and artificial intelligence—and parts of healthcare, namely weight-loss-drug makers Eli Lilly and Novo Nordisk.
“We’re still seeing this dichotomy or dispersion in earnings,” says Joe Amato, chief investment officer at Neuberger Berman, noting that profits for companies in many other cyclical sectors might actually decline in the first quarter.
Earnings are expected to improve as the year progresses; second-quarter profits are forecast to rise nearly 10% and earnings for all of 2024 are estimated to be up 11% from 2023 levels. “We should start to see better balance,” Amato said. “Companies should gain some earnings momentum because of the resilience of the U.S. economy.”
It’s put up or shut up time. Anthony Saglimbene, chief market strategist at Ameriprise Financial, says he’s unsure whether consumers and corporate customers can continue to spend enough to support broader earnings growth. Overall inflation may be receding—or not—but many Americans still feel tapped out, particularly as rent costs and gas prices keep soaring. “A lot of companies are finding it to be a harder time to raise prices,” Saglimbene says.
Hopefully, demand for goods and services won’t evaporate. Wall Street needs strong earnings even more than usual as rate cut hopes fade. The good news is that stocks usually follow profits, so strong earnings growth—even in the face of higher interest rates—could offset worries about inflation and a less-dovish Federal Reserve.
Is that asking too much?
Email: paul.lamonica@barrons.com
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