We are in the busiest few weeks of earnings season for Q4 2024. Earnings growth for Q4 as of December 31 was expected to be just under 12% vs Q4 2023, the highest in 3 years. So far, earnings have come in ahead of expectations, growing by almost 13% amongst companies that have already reported. The Financial sector is leading with earnings growth of almost 50% over last year. Most of the “Mag7” is reporting this week with expectations that the Technology sector will grow by more than 20%. Energy sector earnings are expected to decline by 25%.

Companies that have missed estimates have been punished more than in recent quarters.

Current expected earnings growth rates are higher than average, and market sentiment is bullish. But we may have gotten a little over our skis given the past two years’ market performance.

Earnings from Q3 2023 to Q3 2024 grew by 13% for the S&P500. The price level grew by 34%. When we compare the Price to Earnings, we get a “P/E ratio.”  The market’s current P/E multiple is over 28. Long term average is around 17. From Q3 2023 to Q3 2024, the market’s P/E multiple grew from 22 to 26. This indicates prices are growing much faster than earnings.

We have seen prices grow faster than earnings for a couple of years now and it certainly can continue. We are in rarified air with P/E at these levels. Multi-year forward returns are often below average after periods of with high P/E multiple. Determining when this might change is challenging.

The ‘multiple expansion’ is due to increasing positive Sentiment. One may argue that markets are ‘priced for perfection’ currently.

While earnings take months to occur and be reported, sentiment can change far more quickly. If companies that are expected to grow substantially, miss their earnings or revenue targets, sentiment could turn south despite robust earnings growth. When we expect ‘more, more, more’ and only get ‘some,’ the disappointment can be more than the scale of the miss.

Additionally, factors outside earnings can sway market sentiment. Currently, price trends remain positive, and we watch for the earnings AND the reaction to earnings beats, meets, and misses.