Earnings season analysis: Technology delivering fat profits, with lots of caution elsewhere

Published Fri, Jan 26 20246:13 AM EST

Roughly 111 companies in the S & P 500 had reported fourth quarter earnings through Thursday morning and, so far, it's a mixed picture. Good news: LSEG is reporting Q4 earnings for the S & P 500 are starting to creep up, now estimated to increase 4.8%, from 4.4% two weeks ago. Still, that is a considerable decline from the 11% gain expected several months ago. The declines have come from just about every sector, with the exception of technology, which has seen its earnings estimates rise since October 1. A good example: IBM , which beat earnings expectations and highlighted an uptick in demand for artificial intelligence products and services. Bottom line: the earnings picture supports investors' continued enthusiasm for tech. Outside of technology, earnings expectations are lower than three months ago, but are now rising again. "Most companies are seeing their estimates lowered, but it is not as bad as three months ago, when the 10-year Treasury was hitting 5% and a 30-year mortgage was at 8%," Nick Raich from Earnings Scout said. "The market has been anticipating improving earnings expectations, and it's getting them. By that I do not mean that earnings estimates are rising, I mean they are not getting cut as much anymore," Raich added. Commodity deflation doesn't mean lower prices Everyone knows commodity and packaging costs are coming down, but does that mean that companies will be lowering prices? Not necessarily. Sherwin-Williams acknowledged it was seeing lower input costs, but said higher wages were offsetting that. As a result, prices are going up, not down. CEO Heidi Petz remarked, "As we look at our entire cost basket, we see modest raw material deflation, though continued escalation of wages and other costs has led us to implement a 5% price increase in Paint Stores Group effective February 1." Kimberly-Clark said essentially the same thing on its conference call. CFO Nelson Urdaneta pointed out, "Core commodities like pulp, resin, energy [in] dollar terms are expected to be somewhat favorable following the trends that we saw in the back half of last year…However, if you think of other components of our cost basket like distribution, logistics and labor inflation, that's actually going to remain a headwind in this year in '24, and that's pretty much offsetting the tailwinds that we're seeing on the core commodities." Meanwhile, shipper J.B. Hunt last week said hefty insurance costs hurt its earnings. Insurance will continue to be a major inflationary concern this year too , with premiums expected to rise "upwards of 50% to 60%." CEO John Roberts noted that "ultimately these inflationary costs get passed on to customers and consumers." Volume declines pressure revenue A number of companies have been reporting revenue below expectations. Spice maker McCormick reported a 3% decline in volumes and noted "a pressured consumer exhibiting more value-seeking behavior, which resulted in lower consumption." Consumer sales in the Americas declined 4%. Procter & Gamble saw a 1% decline in volumes. That overshadowed the 4% rise in prices as revenues were short of estimates. Demand for its health care products was particularly poor, with that segment's volumes dropping 3%. STMicroelectronics also reported very weak Q1 and FY revenue forecasts. Knight-Swift Transportation posted disappointing revenues as freight demand slowed "meaningfully" in December. The trucker was also hurt by a double-digit decline in prices within its main Truckload segment. Industrials: very choppy Dow Inc. saw lower volumes and pricing within its industrial intermediates & infrastructure business unit. It pointed out it saw "lower demand for industrial applications." CEO Jim Fitterling expects "softness in industrial and durable goods demand to continue" in Q1, but is "encouraged by early positive signals in areas including construction, automotive and consumer electronics." Tuesday afternoon, Texas Instruments cited "increasing weakness across" its industrial business and "a sequential decline" in the automotive sector. STMicroelectronics experienced "further deterioration in industrial [demand]." And while automotive demand was "stable," it saw a "softer growth rate." DuPont saw "additional channel inventory destocking within our industrial businesses" along with continued weakness in China. That was a big reason for its Q4 warning and additionally, its poor Q1 guidance. Some weakness clearly due to China Earlier Tuesday, 3M reported lower volumes in its industrial segment and said it expects mixed industrial end-market demand in 2024, with much of the weakness due to China. 3M gets about 11% of revenue from mainland China. Texas Instruments talked about industrial weakness and said it hasn't seen a recovery in China. ASML remained cautious as export restrictions would affect up to 15% of its China sales. Even Procter & Gamble cited China weakness on its analyst call. CFO Andre Schulten remarked, "Greater China organic sales were down minus 15% versus prior year, underlying market growth was down mid to high-single digits as consumer confidence weakened further." He added that the recovery there has been "somewhat bumpy." Weak first quarter guidance A number of companies provided forward guidance that was below expectations, including FedEx , Humana , Procter & Gamble, Baker Hughes , Conagra , AT & T , Adobe and Dupont. As a result, estimates for the first quarter of 2024 are coming down, now expected to rise 6.2%, well below the 9.6% expected on October 1. Again, most sectors have seen estimates decline, with the exception of Technology, where earnings growth expectations have held steady, at 18.5%. The bottom line on earnings so far: tech is leading, but the short-term trend in other sectors is lower. The market is not expecting that to continue. There are expectations of double-digit gains for 2024 in communications services, industrials, health care and consumer discretionary. The reason: outside of the artificial intelligence story that's driving tech, the macroeconomic outlook is still the main driver. "It's still goldilocks," Raich said. "Inflation is falling, rates are lower and growth is holding up."