Thoughts From Last Week 11-13-2023

Damon Walker, AIF | November 13, 2023

A message from Edge Investment Solution's Damon Walker:

Thoughts From Last Week

Source: FactSet, NFIB, J.P. Morgan Asset Management. All data series are net and represent the % of respondents answering higher less the % of respondents answering lower.

Labor market data over the coming months will be key, as they will help determine, in part, the path for earnings ahead.

With almost 90% of market cap having reported, S&P 500 operating earnings are on track to finish 3Q23 +4.5% y/y. While results have fared well this quarter, we are beginning to see a slowdown on a sequential basis. We are currently tracking a q/q operating EPS decline of 3.8%, with many companies also downgrading guidance for 4Q23 and 2024. At the moment, the weaker than expected guidance falls in line with our view of 2024 earnings expectations as being overly optimistic. The current consensus estimate is for operating EPS to grow ~12% in 2024; we see operating EPS growing in the low-single digits, with the possibility of further downside dependent on economic activity and the dynamic between revenues and costs.

On the latter, the latest NFIB survey results and the October Jobs Reports have provided a timely update. So far this year, revenues have held up decently, as net pricing plans have increased on the back of strong consumption. With that being said, net sales expectations remain negative, perhaps suggesting we are beginning to see demand destruction. Turning to costs, as we show in this week’s chart, since peaking in 2021, net compensation and hiring plans have declined notably and suggest a moderation in labor market strength. This was reiterated in the October jobs report, as nonfarm payrolls came in below expectations and average hourly earnings growth decelerated. Nevertheless, the October NFIB jobs survey also indicated that a high 43% of firms are still reporting they are unable to fill positions and could pose upside risk to the cooling we expect to see in wage growth; but, at the moment this has not materialized.

Labor market data over the coming months will be key, as they will help determine, in part, the path for earnings ahead.