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Unveiling Tom Lee’s 4 Key Reasons for Surpassing Corporate Earnings

  • CNBC commentator Jim Cramer recommends investors to allocate funds to stocks
  • Goldman Sachs analyst finds no compelling reason for a potential market sell-off
  • Tom Lee, head of research at Fundstrat, analyzes U.S. corporate earnings for Q4 2023
  • Lee identifies four positive indicators for the stock market and the economy

Introduction

Renowned CNBC commentator Jim Cramer is making a surprising recommendation to investors. Despite his often inaccurate predictions, Cramer is now advising worried investors who have placed their money in CDs or Treasuries to “find some room for stocks.” This unexpected advice has raised eyebrows among those familiar with Cramer’s track record. However, it comes at a time when the market is booming, and even Goldman Sachs analysts struggle to find reasons for a potential sell-off. Let’s delve into the analysis provided by Tom Lee, the head of research at Fundstrat, regarding U.S. corporate earnings for the fourth quarter of 2023.

Economic Insights

1. Earnings Per Share Estimates

Lee notes that during the results reporting season, earnings per share (EPS) estimates typically rise by 3%. However, this year, the gain is only 0.7%. While this figure seems understated, Lee explains that the EPS estimates of financials have actually dropped by 14% due to the $23 billion fee imposed by the Federal Deposit Insurance Corp. (FDIC) to rebuild the insurance fund after the bailout of regional banks. Excluding this assessment, EPS is 3.6% higher than at the start of the quarter, surpassing the 3.2% historical average.

2. Stock-Market Gains

Another positive indicator is the performance of companies that beat earnings expectations. Lee highlights that these companies are experiencing one-day stock-market gains of 1.1%, surpassing the 0.8% seen in the third quarter. This is the highest level since the fourth quarter of 2022, indicating a positive trend in the market.

3. Double-Digit Earnings Growth

The percentage of companies reporting double-digit earnings per share growth has reached 43%. This figure solidifies Lee’s belief that the first quarter of 2023 marked the end of the EPS recession, as the percentage of companies reporting double-digit growth had bottomed out at 36%. This growth trend is an encouraging sign for the overall health of the economy.

4. Chinese Stock Market as a Leading Indicator

Lee draws inspiration from the Chinese stock market, which is showing signs of bottoming out. He explains that while this is only the stock market bottom, equities often serve as leading indicators for the economy. An improving Chinese stock market strengthens the case that U.S. and global Purchasing Managers’ Indexes (PMIs) have also bottomed out. This, in turn, supports the expectation of improving EPS throughout 2024.

Conclusion

Despite Jim Cramer’s questionable track record, his recommendation for investors to consider stocks is supported by Tom Lee’s analysis of U.S. corporate earnings. Lee identifies four positive indicators, including the growth in EPS estimates, stock-market gains, double-digit earnings growth, and the potential bottoming out of the Chinese stock market. These factors suggest that the first quarter of 2023 marked the end of the EPS recession and indicate a positive outlook for the economy and corporate earnings. As the market continues to perform well, investors may want to consider Cramer’s advice and explore opportunities in the stock market.

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