Earnings season’s here! Who’s excited?

If your hand’s raised, you need to get out more.

I’m just joking. Everyone loves earnings season. It’s a time to celebrate companies which, through contrivance and connivance, managed to make more money than expected over a given three-month window. Anything goes. All’s fair in love, war and capitalism.

Last quarter, corporate America easily hurdled the bar, reporting 8% EPS growth in aggregate, a pace more than double that seen by bottom-up company analysts.

As a reminder I hope no one needs, this is a charade. Bottom-up consensus is informed in no small part by corporate management, and in most cases, analysts aren’t especially enterprising. They go on the guides, which means management can set a low bar for itself, setting up “beats.”

The figure above shows consensus as it stood headed into the past several quarters (and also looking out into year-end). As a matter of course, corporates collectively clear the bar they help set. Again: This is a charade. It’s asinine, but so’s getting up every day. So, make allowances.

Consensus is looking for 3% aggregate EPS growth from Q1 earnings. That’d be a step down from Q4’s actual pace, and not a small one either. But the pre-season bar’s the highest it’s been in nearly two years.

The US did experience an earnings recession, but it was shallow both in an absolute sense and relative to some of the more dire predictions. Suffice to say (and I’ll try to be generous and diplomatic here) bearishly inclined top-down equity strategists should’ve listened to their colleagues in single-stock coverage. From mid-2022 through mid-2023, some top-down sell-side strategists and their compatriots on the wealth management side insisted, in caustic terms, that bottom-up company analysts weren’t being proactive enough in cutting estimates. As it turns out, the reason those estimates weren’t cut is because, in a lot of cases anyway, they didn’t need to be.

That’s not to suggest sundry negative operating leverage bear cases were without merit. That bear case did pan out. Again: There was an profit recession. And big-“tech” (i.e., Tech and Comms Services) suffered an egregious drawdown in 2022, when top-line growth flatlined and the likes of Meta saw their shares decimated to the tune of ~75%.

But the mega-caps right-sized rapidly, cutting costs and refocusing, and as a whole, corporate America simply didn’t succumb to the kind of deep earnings recession some bears insisted was inevitable.

And, so, here we are in 2024 with stocks at (or near) records and bottom-up consensus looking for double-digit EPS growth by Q4. Margins probably troughed sequentially last quarter. The figure below, from Goldman, gives you some context.

As David Kostin, who’s generally managed to stay on the right side of things over the past couple of years, noted in his latest, bottom-up consensus sees the S&P 500 posting 10.9% net margins for Q1. That’d represent 28bps of sequential compression, but it’d be slightly better versus Q1 2023.

In a testament to the kind of market we’re in, the top 10 S&P stocks (i.e., the mega-caps) are seen posting 400bps of margin expansion versus Q1 of last year. The rest of the index (i.e., the “S&P 490”) will probably see margins contract by more than 50bps.

Investors, Kostin said, “will be looking for answers to three questions during Q1 earnings.” Those questions: 1) “What will results indicate about the strength of the consumer?”; 2) “Will the largest S&P stocks exceed lofty consensus expectations?”; 3) “Will results show continued momentum in artificial intelligence?”

At the risk of pre-judging Q1 results, my guess would be that the answers are: 1) The consumer’s “resilient”; 2) the largest companies are still minting money, some faster than expected, others slightly slower, but all at an unfathomable rate; 3) AI still has momentum, and it’ll be another two or three quarters before we know whether it’s a sugar high or something more sustainable.