By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. corporate earnings should improve at a stronger clip in 2024 as inflation and interest rates come down, analysts predict, but worries about slowing economic growth hang over the outlook.

S&P 500 earnings are expected to increase 11.1% overall in 2024 after rising a modest 3.1% last year, according to estimates compiled by LSEG.

But earnings growth needs to be enough to support lofty valuations in stocks. The S&P 500 index is trading at 19.8 times forward 12-month earnings estimates, well above its long-term average of 15.6 times, based on LSEG Datastream data.

Falling rates helped drive a sharp year-end rally, especially after the Federal Reserve in December opened the door to interest rate cuts in 2024 after a rate hike campaign that started in 2022.

The Dow Jones industrial average in December hit its first record high close since January 2022, while the S&P 500 is within striking distance of its all-time closing finish. The S&P 500 rose 24.2% for the year.

“The market trading where it is at current levels demands earnings to show strong growth next year,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.

Among concerns for 2024 is the lingering effect of higher interest rates on the economy and corporate earnings, he said.

The U.S. government confirmed in December that economic growth accelerated in the third quarter. Gross domestic product increased at a 4.9% annualized rate last quarter, the Commerce Department’s Bureau of Economic Analysis (BEA) said in its final estimate.

Profit estimates could weaken further as companies begin to open their books on the fourth quarter and give guidance for the first quarter and the rest of 2024. The release of fourth-quarter results will kick into high gear in mid-January.

“We’re definitely seeing those (first quarter) estimates weakening at a faster pace,” said Nick Raich, chief executive of The Earnings Scout. “Look at a name like FedEx, and that’s a good bellwether of the global economy.”

FedEx shares tumbled 12.1% Dec. 20, a day after the package delivery company reported earnings for the quarter ended Nov. 30 that fell short of analysts’ targets and cut its full-year revenue forecast.

Estimated year-over-year earnings growth for S&P 500 companies for the first quarter of 2024 is now at 7.4%, down from 9.6% on Oct. 1, based on LSEG data. For the fourth quarter of 2023, S&P 500 earnings are forecast to rise 5.2%, down from 11% growth seen on Oct. 1.

To be sure, investors point to cooling inflation as a strong positive for companies in 2024.

“The consumer still seems to be healthy, inflation is getting better, employment is still strong, interest rates are going down and gas at the pump is going down,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.

Moreover, “these companies have streamlined their businesses and margins are decent,” he said.

U.S. prices fell in November for the first time in more than 3-1/2 years, pushing the annual increase in inflation further below 3%, a recent Commerce Department report showed.

Optimism over growth in artificial intelligence is likely to continue to help companies with results and outlooks tied to AI technology.

“While the rebound in TECH+ (earnings per share) began in 2Q23, earnings for the rest of the market are expected to follow in the year ahead,” Jonathan Golub, chief U.S. equity strategist & head of portfolio analytics at UBS Investment Research, wrote in December.

The “Magnificent 7” group of megacap stocks – Apple, Microsoft, Alphabet,, Nvidia, Meta Platforms, and Tesla – accounted for 62.18% of the S&P 500’s total return in 2023, according to S&P Dow Jones Indices senior index analyst Howard Silverblatt.

Also, the Fed’s recent dovish pivot has boosted the case for the U.S. dollar to weaken, which would make U.S. exporters’ products more competitive abroad.

But whether 2024 earnings forecasts are assuming too many of these positives remains a concern.

“The market is assuming a near-perfect landing with inflation cooling without a significant impact to demand and pricing power — not likely in our view,” J.P. Morgan equity strategists wrote in their 2024 outlook.

“Current consensus S&P 500 forward EPS growth at 30%ile (+11%)… is in harmony with a Goldilocks outlook for growth and inflation.

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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