(Bloomberg) — This earnings season gave investors ample reasons to pour money into stocks even as traders grow increasingly wary about the economy and the timing of the Federal Reserve’s interest-rate cuts.
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Results for the final quarter of 2023 signaled continued corporate strength despite the angst. Balance sheets held up, Big Tech darlings powered on and operating margins were steady as companies slashed costs. All told, Corporate America ended the year on a surprisingly strong note.
“The recession never happened, and the end result is a lot of companies got very efficient and are doing really well and their bottom lines are benefiting from it,” said Robert Conzo, chief executive officer of The Wealth Alliance. “That speaks very well for the American economy going forward if they could continue operating efficiently and interest rates start to pull back.”
Here are the biggest takeaways from the latest earnings season.
Results were better than anticipated
With results out from nearly all S&P 500 Index companies, fourth-quarter earnings look stellar. Growth was nearly 8%, compared with expectations for a 1.2% rise before the season started.
Those beats helped to offset macroeconomic uncertainty. Over the past two months, traders have pushed back their bets on when the Fed will start to cut interest rates. Fading hopes for easing monetary policy did little to aid equities at the start of the year just as earnings season came into focus. Some 76% of firms surprised to the upside — outperforming the 10-year average of 74%, per data compiled by Bloomberg Intelligence — prompting Wall Street to confidently snap up equities at a rapid clip.
Nvidia helms the leading big tech trade
Nvidia Corp.’s earnings were a highlight this season. The company beat expectations and gave a solid future guidance that helped alleviate fears that artificial intelligence growth might slow in the near term.
The chipmaker also led the so-called Magnificent Seven tech companies, whose earnings beats lifted the S&P 500’s overall results. The seven largest stocks in the index — from Apple Inc. to Meta Platforms Inc. — saw their profits rise 59% in the fourth quarter. Excluding those firms, the remainder of the index posted a 1.6% profit drop, according to BI.
Read more: Big Tech’s Roaring Profit Machine Eases Fears of Rally Reversal
Layoffs led to better margins
Margins came in somewhat mixed for the quarter. Among S&P firms, 45% reported operating margins that beat estimates — below the share of upside surprises of the past three quarters, according to BI data. Yet, corporate net income margins were closer to the average of 67% over the past year.
Among those companies that did slash expenses, many touted increased efficiencies and, in particular, job cuts. Firms mentioned layoffs on earnings calls at the highest rate since the pandemic. The reductions cut across sectors — from tech firms like Salesforce Inc. and Amazon.com Inc. to lenders like Citigroup Inc. and Deutsche Bank AG.
“Companies clearly got the note that layoffs and focusing on efficiency and margins is something that the stock market really likes,” said Will Rhind, chief executive officer of GraniteShares. “The companies that did that were well rewarded.”
Guidance mattered the most
Results mattered, but in many cases, forward-looking guidance mattered more. According to BI data, firms that revised their future earnings per share or sales outlooks to the upside posted a gain of about 3% relative to the S&P 500. That compares to the average 1.3% advance since 2020.
Overall, investor reactions were more volatile this quarter — with beats propelling higher-than-usual next-day moves, and misses prompting sharper dives, according to BI. “The market was fueled up more by the guidance,” said BI’s Wendy Soong, adding that “the AI frenzy makes markets more irrational.”
Aiding some of the volatility, of course, were a few “clerical errors.” From Planet Fitness Inc.’s faulty 2024 forecast to the extra zero in Lyft Inc.’s earnings release — which took a measure of earnings margin expansion to 500 basis points when it was really 50 basis points — a number of earnings gaffes catalyzed outsized share moves before firms remedied their reports.
Read more: Earnings Gaffes Pile Up a Week After Lyft Typo Roiled Shares
Europe sputtered without big tech
The strong results from US companies didn’t extend across the globe. Earnings in Europe are trailing Corporate America by the most in three years, according to JPMorgan Chase & Co. strategists, who estimate that Stoxx 600 profits dropped 11% in the fourth quarter compared with an 8% rise in the US. That’s largely down to the impact of sputtering regional economies — with both Germany and the UK in recessions — and an underwhelming recovery in China, which is a sizable market for Europe’s miners, automakers and luxury goods makers.
In addition, Europe’s absence of technology mega-stars, which have been the biggest drivers in the US, contributed to the lackluster results. While Europe boasts some AI beneficiaries such as ASML Holding NV, ASM International NV and BE Semiconductor Industries NV, their performances trail Nvidia’s.
And some fund managers doubt that Europe’s outlook will get much brighter this year.
“Our positioning would tell you we haven’t decided that Europe earnings will outperform the US,” said Richard Flax, chief investment officer at European digital wealth manager Moneyfarm. “For that view to change, we would want to see a re-acceleration in global growth, particularly outside the US.”
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