Estimates for the S&P 500’s fourth-quarter 2023 earnings are getting higher, but if you look under the hood, the message is mixed. Let’s take a hard look at the “good news/bad news” scenario currently unfolding for Q4 earnings.

As of January 16, the S&P 500 is reporting a year-over-year earnings decline of -0.1% for Q4, according to research firm FactSet. That would represent the fourth decline in earnings in the past five quarters reported by the index.

However most S&P 500 companies typically report actual earnings that surprise on the upside. This earnings season is shaping up to conform to precedent.

Based on the historical average improvement in the earnings growth rate during reporting seasons, the index will probably report year-over-year growth in earnings of more than 4.0% for Q4. If this level of growth turns out to be the case, it would prove a significant tailwind for equity markets.

Read This Story: Projected Earnings: Where The Rubber Hits The Road

When companies in the S&P 500 report actual earnings above estimates during an earnings season, the overall earnings growth rate for the index rises because the higher actual earnings numbers supplant the lower estimated earnings numbers in the calculation of the growth rate.

The S&P 500’s actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters (see chart).

Over the past 10 years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.7% on average.

Among the 29 S&P 500 companies that have reported actual earnings for Q4 2023 to date, 76% have reported earnings above the mean earnings estimate.

The big banks: conflicting signals…

Q4 estimates are getting rosier, but the season started on a conflicted note as financial services underperformed. Bank earnings tend to establish the tone for the season and the overall economy. So far, the big banks have released Q4 earnings that have been mixed at best.

JPMorgan Chase (NYSE: JPM), the largest U.S. bank by assets, kicked off the season with lower fourth-quarter profit largely because it paid a $2.9 billion fee related to the rescue last year of failing regional banks.

Citigroup (NYSE: C) reported a $1.8 billion quarterly loss, as well as massive layoffs. Bank of America (NYSE: BAC) reported that Q4 net income fell more than 50% from a year ago. Wells Fargo (NYSE: WFC) reported higher quarterly earnings but warned that interest income would be lower for the year.

Morgan Stanley (NYSE: MS) reported Q4 revenue that surpassed expectations, boosted by strength in investment banking, but the bank missed consensus earnings estimates. PNC Financial Services Group (NYSE: PNC) also reported earnings below consensus expectations.

However, Goldman Sachs (NYSE: GS) reported Q4 results that soundly beat expectations on the top and bottom lines. The company announced that profit had increased by 51% from a year ago, to just over $2 billion. The bank’s emphasis on growing its asset and wealth management division, which is closely tied to stock market performance, turned out to be a winning strategy.

Financial services are a bellwether for the wider economy, so these operating results from the behemoths of banking send inconclusive signals.

A mitigating factor is that these bank numbers understate inherent financial strength, because most of these institutions set aside billions of dollars to replenish a shortfall in a government insurance fund that was depleted in last year’s regional bank failures.

We’ll see how the rest of the season pans out for other sectors. Specifically, cyclical companies that benefit from economic growth are expected to perform well.

Looking further ahead, FactSet reports that all eleven S&P 500 sectors are predicted to report year-over-year earnings growth in calendar year 2024. Five of these sectors are projected to report double-digit growth led by health care, communication services, and information technology.

The main U.S. stock market indices closed lower Wednesday, amid potential supply chain disruptions due to overseas turmoil. This geopolitical dynamic is in turn boosting bond yields as inflation fears re-emerge. Stocks fell as follows:

• DJIA: -0.25%
• S&P 500: -0.56%
• NASDAQ: -0.59%
• Russell 2000: -0.73%

The benchmark 10-year U.S. Treasury yield jumped past 4.1%, spooking equity investors.

A host of uncertainties could derail the positive outlook for corporate performance. War is worsening in the Middle East and Eastern Europe, and deep-seated rancor besets the U.S. presidential election.

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John Persinos is the editorial director of Investing Daily.

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