According to the information from the Wise Finance app, CITIC Securities released a research report stating that the earnings expectations for US stocks have been revised downward recently, but the disclosed 24Q2 results have exceeded expectations. Looking back since 2018, the performance of the S&amp;P 500 has consistently exceeded expectations, but the fluctuations in the macroeconomic situation in the US compared to expectations cannot explain the continuous outperformance of the US stock market. CITIC Securities found that there is a clear downward trend in market expectations for earnings as the financial report disclosure approaches, leading to the continuous outperformance of US stock earnings. However, this adjustment has a relatively small correlation with short-term stock price changes, as CITIC Securities believes that the market is more concerned about changes in future prospects.
The current downward revision of earnings expectations for US stocks this quarter is consistent with historical trends, and the earnings expectations for N18M show that confidence in the future fundamentals of US stocks remains unchanged. CITIC Securities believes that the recent fluctuations in earnings expectations for US stocks do not need to be overly concerned. In terms of industries, considering the recent upward revisions in N18M earnings expectations over the past month, as well as the adjustments in quarterly earnings expectations, it is recommended to actively focus on the information technology, communication services, and real estate industries.
Key points from CITIC Securities:
The recent 24CY profit forecast for the S&amp;P 500 has been significantly lowered, but the results for 24Q2 have exceeded expectations.
Since July, there has been a clear downward trend in the full-year profit forecast for the S&amp;P 500 index for 2024. As of July 19, the full-year profit growth rate forecast for the S&amp;P 500 has decreased by 0.5 percentage points to 9.9% from the end of June, and excluding the seven tech giants, the profit forecast for the remaining component stocks has also been lowered by 0.5 percentage points to 5.7%. Combined with the somewhat pessimistic sentiment in the current US stock market, it has deepened investors' doubts. This period also happens to be when the 24Q2 financial reports began to be disclosed. As of July 19, 2024, 71 component stocks of the S&amp;P 500 have disclosed their financial reports, accounting for 15.3% of the index's total market value. From the disclosed financial reports, earnings exceeded expectations by 5.0%, and revenue exceeded expectations by 0.5%.
In the 25 quarters since 2018, the performance of the US stock market has consistently exceeded expectations.
Looking back at the performance of all quarters of the S&amp;P 500 component stocks (comparable basis) since 2018, although there have been fluctuations in year-on-year growth rates, the performance of the entire US stock market has exceeded expectations in all 25 quarters. From the perspective of individual stocks, in almost every quarter, more than half of the stocks have exceeded earnings expectations (+2.5%), while the proportion of stocks exceeding revenue expectations is relatively low, but it continues to exceed the proportion of those falling below expectations (-2.5%). Overall, whether from the total earnings of the US stock market as a whole or from the perspective of individual stocks, performance has consistently exceeded expectations since 2018. In terms of industries, more than half of the quarterly earnings of all industries have exceeded market expectations by more than 2.5%, with the healthcare, real estate, and essential consumer goods industries accounting for over 90% of this situation; in terms of revenue, most industries have met expectations during the observation period, with the financial and real estate industries having more quarters with revenue exceeding expectations.
Compared to the continuous outperformance of corporate earnings, the fluctuations in the US macroeconomy compared to expectations are significant.
Although the trend of the US stock market index has been better than expected, the macroeconomic performance in the United States has not met expectations for many periods since 2018, which is quite different from the continuous outperformance of stock market performance. Overall, there is no sustained outperformance of the US macroeconomy. Therefore, we believe that the significant outperformance of US stock quarterly performance is largely unrelated to macroeconomic deviations from expectations.
The core of the sustained outperformance of US stock performance lies in lowering expectations.
From the statistical perspective, during the period of the pandemic and post-pandemic recovery, the average magnitude of US stock profit outperformance reached 14.1%, with revenue reaching 3.3%; in other periods, the average profit outperformance magnitude was also as high as 5.7%, with revenue reaching 1.4%. However, we found that except for the pandemic period, there was a clear trend of downward revisions in quarterly performance forecasts within 30 days before disclosure, with an average downward revision of profit expectations by 1.9%, and financial results significantly exceeding expectations (average +5.7%). If we compare the actual values with the market consensus expectations before the downward revisions, there are individual quarters that meet or fall short of expectations, and the overall outperformance magnitude (mean 3.7%) is significantly lower than the former; this phenomenon also exists in revenue, but to a lesser extent. Therefore, we believe that there may be a common practice among sell-side institutions studying US stocks to suppress market expectations for individual stock profit performance before the release of financial reports, thereby demonstrating the phenomenon of sustained outperformance of US stock profits.
The impact of changes in quarterly performance expectations and deviations from expectations on stock prices is minimal.
In terms of stock prices, except for the pandemic period, out of 17 quarters, only 9 quarters saw some pressure on stock prices in the 15 days before financial report disclosure, and only 4 quarters saw a rebound in stock prices after the release of better-than-expected results. For the overall statistics of 17 quarters, the average increase in stock prices for these stocks that experienced downward revisions in expectations and ultimately outperformed expectations was 0.1% in the 15 days before financial report disclosure and 0.2% after the financial report disclosure. It can be inferred that changes in performance expectations and deviations from actual results have minimal short-term impact on stock price changes. Therefore, we consider the adjustment of performance expectations during the financial quarter to be market noise. However, from the perspective of comparing with company guidance, based on the situation in 24Q1, we also found a low correlation between the deviation of quarterly earnings from company guidance and the change in stock price after performance disclosure.
It is recommended to focus on the changes in expectations for the next 6-18 months, which isolates market noise before the financial quarter and fully integrates the future guidance provided by the company.
Through case studies, we speculate that the market may pay more attention to changes in future guidance provided by companies. However, it is difficult to quantify and statistically analyze the future guidance provided by companies. Therefore, we have constructed a performance expectation indicator for the next rolling 6-18 months (N18M), which isolates market noise before the financial quarter and integrates the comprehensive research by market sell-side analysts on changes in company future prospects if the company provides future guidance. By backtesting this indicator on the 17 quarters statistically analyzed earlier, looking at the situation where the earnings or revenue indicator changes by more than 1% before and after the financial report release, when the earnings or revenue indicators are raised, the stock price averages a 1.5% increase over three days; while in the case of a 1% downward adjustment in earnings and revenue indicators, the stock price decreases by 0.9% and 1.5% over three days respectively
If both are raised and both are lowered, the stock prices change by 2.1%/-2.3% respectively. Overall, this indicator shows a positive correlation with stock price changes and can also track changes in the fundamental expectations of the US stock market well.
Recently, the earnings expectations for the 24Q2 quarter have been revised downward, but the future outlook is stable with some improvement, providing support for the fundamentals of the US stock market.
We have observed that the downward revision of quarterly earnings expectations during this period aligns with the pattern we have summarized. Additionally, considering that many individual stocks have not yet entered the 30-day period before quarterly report disclosure, where expectations have significantly declined in the past, we believe that earnings expectations for this quarter will continue to be revised downward, impacting the full-year earnings expectations for 24CY. However, based on our constructed N18M expectation indicator, the overall profitability and revenue expectations for the US stock market during the same period are still increasing, indicating a steady confidence in earnings growth. We believe that the current market outlook for the future fundamentals of the US stock market remains supportive. In terms of industries, there is a clear differentiation, with industries such as finance, information technology, communication services, real estate, and healthcare showing significant upward adjustments in N18M expectations over the past month, while other industries have experienced varying degrees of downward adjustments. Considering the current earnings expectation adjustments for this quarter, information technology, communication services, and real estate have strong fundamental expectations support; although earnings expectations for finance and healthcare have been revised downward this quarter, the future outlook is positive, with strong fundamental expectations support. On the other hand, the energy and materials sectors may have weaker fundamental expectations support in the near future.
Risk Factors:
<ol>
<li>US economic cooling beyond expectations; 2) US inflation data exceeding expectations; 3) Overseas central bank monetary easing below expectations; 4) Liquidity risks in the US financial system; 5) Escalation of geopolitical conflicts; 6) Limited significance of historical data for reference</li>
</ol>

06030

600030

CITIC Securities released a research report stating that the recent earnings expectations for US stocks have been lowered, but the disclosed 24Q2 earnings have exceeded expectations. CITIC Securities believes that the market is more concerned about changes in future prospects and recommends focusing on the information technology, communication services, and real estate industries. The S&P 500 has consistently exceeded expectations in the past quarters, but the reasons for the sustained outperformance of the US stock market index cannot be explained. Although earnings expectations for US stocks this quarter have been revised down, the fundamental outlook remains confident. Currently, investor sentiment is leaning towards pessimism, deepening concerns. As of July 19th, 71 stocks have already disclosed their financial reports, with total earnings exceeding expectations by 5.0% and total revenue exceeding expectations by 0.5%

Zhitong

CITIC SEC

CITIC Securities Co., Ltd.

CITIC Securities Co., Ltd.: No need to pay too much attention to the fluctuations in US stock performance. It is recommended to actively focus on information technology, communication services, and real estate