Six things to expect from January and February 2024 earnings season

It’s that time of year again… We’re speaking, of course, of earnings season. As January often brings the Q4 and full results for the financial year, it’s both a beginning and a reflecting time for investors.

But, with 2023 having been such an unpredictable year – especially with its surprise happy ending of a ‘soft landing’ for the United States – what should investors expect from earnings season this time around? We’ve highlighted five things to look out for.

1. Less-than-stellar consumer discretionary earnings

When growth is slow and the cost of living high, usually share prices linked to household staples tend to perform well, while consumer discretionary items do the opposite. But, with America’s economy seeming to have escaped recession and is growing enthusiastically as we speak, sure consumer discretionary will post good earnings?

Not just yet, say S&P Global. On January 4th, S&P Global’s Dylan Thomas and Annie Sabater opined that ‘Consumer discretionary remains highest risk sector in Q4 2023’:

Consumer discretionary continued its run at the top of S&P Global Market Intelligence’s quarterly analysis of US public sector risk as inflation-wary consumers remained cautious spenders… Consumer discretionary companies were the most shorted stocks on US exchanges in the fourth quarter through Nov. 30, 2023, and they were the most likely to issue lowered corporate guidance through Dec. 11, 2023, signs of a shaky outlook. Consumer discretionary also ranked among the top five sectors on an analysis of default probability, although it was running well behind the leading sector, healthcare.”

2. Disappointing numbers from banks to continue

On January 8^th, the Financial Times reported that the bigger US bank stocks are expected to report a steep increase in defaults from customers, due to the still-punitive interest rates most consumers face. This is expected to have shrunk most banks’ earnings somewhat, even though the interest itself is worth more, since they’re getting less of what’s owed to them.

In fact, some have seen the writing on the wall with this one for some time. Moody’s rating agency downgraded banks’ outlook, based on this, in early December. Similarly, Fitch’s rating agency also said in December that:

We expect 2024 default rates of 3.5 percent to four percent for leveraged loans, and five to 5.5 percent for [corporate high yield], up from 2023 default forecasts of three percent to 3.5 percent.”

Fitch’s directly linked this to the macroenvironment and its effect on banks’ cash flows.

The higher-for-longer interest rate environment will erode highly leveraged issuers’ free cash flow positions, as we expect many of them to be unable to offset the higher interest expense through EBITDA growth, especially as many issuers are experiencing declining operating performance. In tandem with a slowing economy and tighter access to capital markets, this will lead to an increase in 2024 default volume.”

Now that some of the biggest banks have already reported their earnings – most notably JPMorgan Chase & Co, Citi, Wells Fargo and Bank of America – we can see some truth in this. Citigroup reported a loss in its Q4 results last week, including net credit losses of $71 million (as opposed to $28 million in Q3) and a total cost of credit that had skyrocketed from $62 million to $185 million in just one quarter.

3. Splashy dividends from fuel stocks

‘It’s raining dividends, hallelujah’ could arguably be then anthem for energy stock investors this quarter.

For example, ExxonMobil announced in December that it’s set to deliver a whopping $14 billion in earnings and cash flow growth over the next four years – and that it plans to more than double its earnings by 2027 from its 2019 levels, along with boasting “increased shareholder distributions.”

TotalEnergies increased their dividend by seven percent in 2023 for all quarters, while Shell have paid out dividends worth more than $11 billion in the past year, as pointed out by Global Witness.  

Some, however, are skeptical of the longer-term future of fuel stocks in the wake of COP28’s historic pledge to ‘phase out fossil fuels’, and see the extravagant dividends as a honeypot attempt by a doomed industry to keep investors interested even as its days are numbered.

Read more: Big oil, big dividends… not-so-big earnings?

4. Luxury stocks to be interesting in 2024

According to Statista, the luxury market (including luxury watches and jewellery, designer fashion and upmarket cosmetics and fragrances) is expected to grow by about $14 billion (about three percent) in 2024 to represent a total of around $369 billion worldwide.

In spite of this, luxury brands themselves had a touch time in 2023. The share price of LVMH sank in October 2023 when it reported a revenue growth of nine percent in its latest earnings report – a significant decline from Q2’s 17 percent. Its rival, Prada, similarly saw share prices drop more than ten percent in the last quarter of 2023.

High inflation has largely been blamed for these disappointing figures – that non-essential aspirational purchases take a backseat in such climates.

This means that, now, with inflation seemingly under control in the US (the world’s largest luxury-buyer currently) and with interest rates set to drop from sometime in 2024, it will be interesting to see what next for the world’s most well-heeled stocks.

5. A titan time for tech stocks

It’s been a full year since AI fever swept the globe, with ChatGPT’s wildfire-like spread in December 2022. And now, in 2024, AI looks set to be trending again, according to a Fortune article which stated that:

We believe tech stocks will be up 25% in 2024,’ [Wedbush analyst Dan] Ives wrote… adding that “the Street and tech world await ‘the Year of AI.’”

While tech stocks encompass far more than just AI and robotics, it’s certainly been a cracker for tech stocks. Fidelity reported recently that the information technology sector’s performance, as of January 5^th, is expected to have increased by an average of 51 percent in the past year.

This is especially impressive when compared to energy stocks, which were down 0.17 percent in the same period, and the mighty consumer staples sector, which usually do well in times of high inflation, sitting at a performance of -2.18 percent.

6. Divisive opinions on the Magnificent Seven

The heavy-hitter US stocks nicknamed the ‘magnificent seven’ – namely Apple, Nvidia, Tesla, Microsoft, Alphabet, Amazon and Meta Platforms – are getting very different outlooks this quarter.

Many analysts and market experts are predicting that the giants will take a well-earned rest in 2024, with earnings dipping marginally below their historic highs in 2023.

Meanwhile, Goldman Sachs has said that:

The massive outperformance of the “Magnificent 7” mega-cap tech stocks has been a defining feature of the equity market in 2023. The stocks should collectively outperform the remainder of the index in 2024… However, the risk/reward profile of this trade is not especially attractive given elevated expectations.”