When we gauge the US corporate EPS pulse there are signs of improvement but also caveats around the quality of the recovery.  

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Glass half full: A big recovery in 2024 EPS growth is projected

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Exhibit 1 shows the latest consensus 2023 and 2024 EPS growth rate projections across the regions. It also shows where these projections stood at the start of the year (dots). The US 2023 EPS growth forecasts have deteriorated and now stand at3.4%.

Is this the nadir? On a positive tack however, the 2024 EPS growth forecasts have improved and now stand at 13.4%.

We also show in Exhibit 3 following the latest Q1 EPS releases the 2023 and 2024 EPS estimate shave seen their first uptick in over a year.

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Exhibit 1: The status of consensus regional EPS growth forecasts

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^{Source: Wilshire and FactSet. Data as of May 17, 2023.}

What sectors are contributing to the 2024 recovery outlook?

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Exhibit 2 shows the 2023 and 2024 consensus top 10 US sector EPS growth rate projections. It also shows the sector weighted contributions that determine the aggregate level. Looking at the 2024 total market EPS growth rate projection of 13.4% ,3.4% of that growth (c.25%) is accounted for by contribution from the technology sector. However, as this is a similar sized contribution to that of 2023 the technology sector is not the main driver behind the 2024 improvement.

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We highlight the financials, consumer durables, electronic technology, energy, and health technology sectors as the primary contributors to the improved outlook.

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Exhibit 2: US top 10 sector 2023 & 2024 EPS growth rates and contributions.

^{Source: Wilshire and FactSet. Data as of May 17, 2023.}

Glass half empty: The improvement is purely a function of 2024 estimates being revised down at a slower rate compared to 2023

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The EPS growth rate compares the EPS from one period against another. This is why when gauging the quality of the growth rate projections it is important to analyze the profile of the underlying EPS forecasts. Exhibit 3 shows the estimate trails for aggregate US consensus forecasts for 2023 and 2024.It shows that both series or estimates have declined from the start of the year ( 2023 by-6.5% and 2024 by -3.1%). This implies the improvement in the 2024 growth forecast (the gap between the two lines) has not been high quality as it is a function of the denominator series deteriorating at a faster rate.

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Exhibit 3: The US 2023 and 2024 EPS estimate trails

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 ^{Source: Wilshire and FactSet. Data as of May 17, 2023.}

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Q1 returns were a function of 3 phases -A goldilocks rally in January (reflecting optimism that a recession would be avoided, and the Fed were almost done) followed by a sharp decline (from the start of February to mid-March) driven by concerns over both a hawkish Fed and bank contagion angst. Finally, late March saw a strong rally as the 'fear trade' dissipated.

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Exhibit 1: The return for the FT Wilshire 5000 index

^{Source: Wilshire. Data as of March 31, 2023.}

Q1 saw US banks underperform regional peers following the SVB collapse

The collapse of Silicon Valley Bank (SVB) in early March generated global contagion angst resurrecting 2008 GFC redux risk aversion in markets. Exhibit 2 shows that US banks saw the largest relative performance decline compared to other regions in Q1.

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Exhibit 2: The relative performance of the bank sector across the regions in Q1

^{Source: Refinitiv. Data as of March 31, 2023.}

However, declining real yields and interest rate expectations buoyed risk appetite

The market response to heightened bank contagion risk was to price in a big decline in year-end interest expectations (reflected in the decline in 2-year bond yields) and a weakening in real yields. Once contagion angst started to dissipate by mid-March, easing financial conditions became the key driver behind the subsequent rally in risk appetite that saw the FT Wilshire 5000 post a +2.7% return for the month.

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Exhibit 3: 2-year bond yields declined sharply

^{Source: Factset. Data as of March 31, 2023.}

The rally in the Technology and the Growth style were the key features of Q1 performance

Rather than the emergence of bank contagion concerns, the key feature of Q1 performance was the strength of the recovery in Technology stocks. Exhibit 4 shows the relative performance of the technology sector and the relative performance of the growth style versus value. The performance of technology and growth style (long duration equity trades) is closely correlated to movements in US real yields. The positive inflection in Q1 was connected to signs that US real yields had peaked.

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Exhibit 4: The relative performance of the technology sector, Growth style vs real yields.

^{Source: Wilshire, Factset. Data as of March 31, 2023.}

The dominance of the tech sector contribution in Q1 a mirror image of the 2022 profile

Exhibit 5 shows the sector-weighted performance contributions (the combined impact of sector weight and sector performance) for the FT Wilshire 5000 for Q1 vs the whole of 2022. The combined contributions for the technology and digital information sectors in Q1 accounted for the majority of the 7.3% for the index. This is a mirror opposite of the negative contributions they generated in 2022.

It can also be seen that the negative contribution for financials (this includes banks) was relatively small in Q1.

The tech rally trumped bank angst in Q1

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Exhibit 5: The decomposition of market returns - 12months and YTD.

^{Source: Wilshire. Data as of March 31, 2023.}

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August witnessed a significant reversal in risk appetite mid-month in response to a succession of hawkish Fed guidance. This bought an end to the +18.6% two-month rally that started on June 16 and peaked on Aug. 16. Since the mid-month peak, the FT Wilshire has declined -8.1%, producing a -3.8% move for the month of August.

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Exhibit 1: August brought an end to the two-month rally  

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‍August saw a rotation back to small cap and value stocks

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The mid-August reversal also produced a rotation in style performance. The table below shows that most of the underperformance of large cap relative to small cap in August was attributable to the larger negative contributions from the financials, digital info and services, health care and technology sectors.

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Exhibit 2: Four sector-weighted contributions account for small cap outperformance

Rising bond yields cause growth to lose momentum vs value

Rising bond yields impacted the highly valued long duration growth stocks in August and this resulted in the growth style (with its large exposure to the technology and digital information sectors) losing momentum relative to value as the month progressed.

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Exhibit 3: Two sector weighted contributions account for growth underperformance

Still a way to go before the growth vs value trade reverts to 2016/17 levels

Exhibit 4 puts the growth vs value rotation into a longer perspective. Despite the scale of value outperformance so far this year, the relative trade still has a long way to go in order for it to mean revert back to 2016/17 levels (parity levels).

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Exhibit 4: The long term perspective on Growth v Value relative performance

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Despite the significant economic, monetary policy and geo-political induced volatility in equity markets in the first half of 2022, consensus EPS growth forecasts have been remarkably resilient. Is this reassuring or is it highlighting the risk that an EPS downgrading cycle is yet to commence?

Glass half full-rock steady EPS forecasts

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Chart 1 shows the status of regional market consensus EPS growth forecasts for this year and next and measures the revisions (deltas) to the forecasts made at the end of last year. US growth forecasts have hardly changed over the last six months.

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Chart 1: Regional consensus EPS growth forecasts

^{Source: Refinitiv, FactSet}

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The US 2022 and 2023EPS trails emphasize the steadiness in the forecasts over the last few months - showing no impact (so far) from the uncertainty and volatility of the market.

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Chart 2: US Estimate trails

^{Source: Refinitiv, FactSet}

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Glass half empty –top-down headwinds yet to impact

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The resilience in consensus forecasts could be providing a false sense of security. One of the key areas of concern is that analysts have a poor track record in predicting macro driven falls in EPS.

Chart 3 compares consensus12M forward EPS forecasts with trailing (reported EPS), and the forward estimates tend to follow (not lead) reported EPS down. Are analysts waiting for guidance and reported data to decline before they start reducing their forecasts?

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Chart 3: Comparing US consensus EPS forecasts to reported (lagging) EPS

^{Source: Refinitiv, FactSet}

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The significant rise in input prices (both labor costs and materials) creates top-down headwinds for corporate margins. Some find it hard to reconcile these headwinds with unchanged EPS estimates.

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Chart 4: US labor costs and input prices

^{Source: Refinitiv, FactSet}

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^{Index 15303321 E0922}

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