Executive summary:
- Consensus expectations call for 5% year-over-year earnings growth for S&P 500 companies in Q1
- The real estate market is likely to benefit from this year's expected Fed rate cuts
- Our cycle, valuation and sentiment investing framework suggests a neutral stance
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed the outlook for U.S. first-quarter earnings season. They also chatted about how this year’s anticipated U.S. Federal Reserve (Fed) rate cuts could impact the real estate market and provided an update on their assessment of markets.
Key watchpoints for investors ahead of Q1 earnings season in the U.S.
Antal-Gilbert and Lin kicked off the segment by previewing the upcoming U.S. first-quarter earnings season, which kicks off the second week of April. Lin said that currently, consensus expectations are for 5% earnings growth on a year-over-year basis for S&P 500 companies. “This would be a step down from the 10% growth seen during the fourth quarter of 2023, but there’s been a trend in previous quarters of companies routinely beating analysts’ start-of-the-quarter estimates,” he observed, noting this will be an important watchpoint as the season unfolds.
In addition, Lin said he’ll be focused on the commentary within earnings calls, including any insights on spending habits from consumer-facing companies. He said U.S. bank earnings also merit close attention, as they often have a lot of details about provisions for credit losses. “This will help provide a sense of what banks think the state of the macroeconomy is,” Lin explained.
Zooming out beyond the first quarter, Lin said that analyst expectations call for around 10% earnings growth in 2024 overall, when compared to 2023. He said this looks like a pretty reasonable assumption if a soft-landing scenario—where economic growth slows but a recession is dodged—plays out in the U.S. While this is the base-case scenario for the strategist team at Russell Investments, Lin noted they still see recession risks as elevated, with a roughly 40% chance of a recession in the next 12 to 18 months.
“If a recession were to occur, U.S. earnings growth could contract by 10-15%, rather than grow by as much. Weighing these probabilities leads us to think that earnings expectations for 2024 might be slightly too optimistic,” he remarked.
Is the U.S. housing market starting to bottom out?
The conversation shifted to the real estate market, with Lin noting that the three interest-rate cuts expected by the Fed this year will likely be pretty supportive for U.S. housing in general. “Looking across a range of housing indicators, there are already some early signs that perhaps the U.S. housing market is starting to bottom out a little bit—albeit at levels that are still somewhat weak,” he observed. Overall, though, the fact that the Fed’s rate-hiking cycle is likely over and rate cuts are on the table is an encouraging sign, Lin said.
Widening his focus to the broader real estate sector—which includes residential housing, multi-family housing and commercial and retail real estate—Lin said the entire sector is pretty sensitive to interest rates and tends to benefit from a lower-rate environment. He noted that real estate can play an important role in investor portfolios, whether through REITs (real estate investment trusts) or real-estate mutual funds.
“At Russell Investments, we think the real-estate sector looks like a compelling place for investors to start thinking about in 2024,” Lin stated. While there could be some volatility in the sector if a U.S. recession does materialize, he stressed that most companies in the space have strong and robust balance sheets, and that he is not expecting a recession anywhere near the magnitude of what occurred in 2008.
Why we prefer to stay neutral in today’s market environment
Antal-Gilbert and Lin concluded with a look at Russell Investments’ portfolio positioning heading into the second quarter of the year. Lin said that across major equity regions, the firm’s portfolio strategies are neutral and positioned close to their strategic asset allocations. The strategist team uses a cycle, valuation and sentiment investment decision-making process, he said, and it currently sees some encouraging signs in the business cycle. “We think there’s a good chance the Fed can engineer a soft landing, but it’s not guaranteed. Bear in mind that our 40% U.S. recession probability is much greater than what it is in a typical year, when the odds are around 15-20%,” Lin remarked.
From a valuation perspective, he said that across most valuation measures, U.S. equity markets generally seem to be on the more expensive side rather than close to fair value, which keeps the strategist team a little bit cautious. Last but not least, a look at investor sentiment shows that while sentiment hasn’t reached euphoric levels yet, there are clear signs that plenty of optimism has already been baked into markets, Lin said.
“Overall, because of the balance of risks we see—some encouraging news but also some factors that make us a little bit more cautious—we tend to prefer to be neutral right now,” he explained. Lin stressed that being neutral means sticking close to a strategic asset allocation and not assuming a markedly risk-on or risk-off position. “Ultimately, we think staying disciplined will help investors make the most of these uncertain times,” he concluded.