No matter what it is, you do better when you prepare. Be it a job interview, a game, an exam or even potentially bad news, practicing, making mistakes, considering alternatives and working on yourself leads to better outcomes. Maybe it’s because doing it builds your confidence—and that’s the real key ingredient.

Similarly, preparing for earnings season is important for a portfolio. Q4 2023 earnings season will officially kick off this Friday, with several banks reporting that day, as is customary. The number of companies reporting will then steadily grow over the following weeks. 

So why prepare for earnings? Because, earnings provide valuable insight into a company’s future, which is what you invest in when you buy a stock. Make sure you: 1) know the date when each of the companies in your portfolio reports earnings,  2) what’s expected by the market, and  3) whether you believe the company could end up reporting better or worse than what is already expected. 

And, most importantly for this season, pay attention to what a company says about their own expectations for the future. This will influence the stock price more than what they report about the past. For the full year 2024, S&P 500 earnings are estimated to be 12% higher than last year. I think it could end up being lower than that - more like mid-single digits.

But, to help in the preparation for Q4 earnings season, here’s some data about the expectations for this quarter’s earnings for both the market and its sectors:

• For Q4 2023, S&P 500 company earnings are expected to increase in aggregate by a small 1.2%. This growth rate is 84% lower than was expected back in September, when the expected year-over-year growth rate was 7.5%. 

  • The Energy, Materials, and Healthcare sectors are expected to show negative growth, while Comm. Services is expected to have the highest increase. 

  • While this seems like bad news on the surface, it’s pretty typical to see earnings expectations fall as the reporting dates near. And the lower expectations, the easier it could be to do better than them.

• The market is a forward discounting mechanism. So future earnings often matter more when it comes to current stock prices. Looking at the earnings growth for future quarters (below), earnings growth expectations have fallen since September for three of the next four quarters, but remain well above the historical average of 1.5-2%.

  • The one exception is earnings growth for Q4 2024. A year from now, earnings are expected to grow even more than was thought back in September—from 13% to 18%.

• This shift coincided with the market rally that kicked off at the end of October 2023, which also coincided with a drop in interest rates and expectations of future interest rates (reminder: the direction of interest rates impacts stock prices, when one rises the other tends to fall).

• So I dove a little deeper in this shift of expectations one year from now. 

  • Earnings growth is expected to be greatest in the healthcare, materials, and consumer discretionary sectors (in that order) — quite opposite to the expected earnings growth by sector for this upcoming quarter. 

  • And these same sectors saw the biggest increase in expectations for Q4 2024, over the September to today period. Most noticeable is healthcare, in bright green, moving from a 7% earnings growth expectation to 30%. 

I suggest paying special attention to stocks you own in these sectors that have gained the most in positive sentiment. My view is those in the healthcare and consumer discretionary sectors could keep up with the higher expectations, while materials and industrials might not.  

While earnings are just one way to analyze a company, every stock is different and expectations matter. Preparing and knowing what’s already baked in to prices can be helpful for your portfolio—and your financial confidence.