It’s halfway through earnings season. Tom Lee has four reasons results are better than they appear.


CNBC commentator Jim Cramer is now telling worrywarts who have parked their money in CDs or Treasurys to “find some room for stocks,” which to followers of the pundit’s oft-awry track record is surely a warning sign. In fact, times are so good that one Goldman Sachs pro wrote that the “most compelling reason for a potential sell-off is that I cannot find one.”

Onto analysis from the rose-colored-glasses Tom Lee, the head of research at Fundstrat, who took a look at U.S. corporate earnings at the halfway point of fourth-quarter results reporting season.

He notes that earnings per share estimates tend to rise by 3% from the start of the results season, but this year the gain is only 0.7%. That figure is understated though, Lee says.

The EPS estimates of financials have dropped by 14% as a result of the $23 billion fee assessed by the Federal Deposit Insurance Corp. to rebuild the insurance fund after the bailout of regional banks. Excluding the assessment, and EPS is 3.6% above the start of the quarter, above the 3.2% average.

Another positive: companies that beat are seeing one-day stock-market gains of 1.1%, above the 0.8% in the third quarter, and the best since fourth quarter of 2022.

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A third positive is that the percentage of companies reporting double-digit earnings per share growth is now at 43%, which to Lee “sort of solidifies” that the first quarter of 2023 was the end of the EPS recession, when that figure bottomed at 36%.

And finally, Lee draws inspiration from the Chinese stock market showing signs that it’s bottoming. “While this is only the stock market bottom, equities are often leading indicators for the economy. And moreover, an improving China would strengthen the case that US and global PMIs have bottomed. And in turn, that supports improving EPS throughout 2024,” says Lee.

The markets

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BlackRock Investment Institute created this chart showing profit margins, which they say have held up better than expected given the reversal of pandemic spending patterns and solid wage growth. But margins are very much divided, with those of the mega-cap tech firms rising while the rest of the S&P 500 pretty much tread water. “We think margins have room to fall further once cost cutting ends and inflation resurges,” they say.

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