Zacks Investment Management

The end of the year is the perfect time for investors to start thinking about possible investment themes. In today’s Steady Investor, we take a look at three to consider for 2024:

• Current inflation ease
• OPEC+ cuts production
• Earnings estimates are falling

Slower Spending, Softer Inflation – U.S. economic trends in consumer spending and inflation might be best summarized with a single word: downshifting. On the spending front, Americans bought less furniture, clothes, and vehicles in October, with consumer spending rising 0.2% in October compared to September’s stout 0.7% month-over-month increase, according to the Commerce Department. October’s pace of increased spending was the slowest since May, as consumers saw personal incomes rise 0.2% in October compared to September’s 0.4% increase. While spending softened a bit in October, inflation also continued in a downtrend. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 3% year-over-year in October, a meaningful decline from the previous month and below the long-term average for inflation. Core prices rose at a 2.5% six-month annualized rate, which is a significant step down from the 4.5% rate for the six months through April. All told, it’s clear to see below that inflation-adjusted consumer spending has moderated in recent quarters¹:

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In our view, investors should not read too much into the soft consumer spending reading. For one, it still marked growth from the previous month. But second, consumers still showed robust spending patterns in areas like travel, where spending on trips abroad rose by 5.8%. Americans also spent more on concerts, museums, healthcare, and other areas. It’s also true that many Americans may have just been waiting for deals to arrive in November. Consumers spent $38 billion in the five-day Thanksgiving period through ‘Cyber Monday,’ up 7.8% from 2022 levels.

OPEC+ Cuts Production Again, But Oil Prices Aren’t Rising – Saudi Arabia and other OPEC+ nations have continued to pursue production cuts throughout 2023, with the latest round calling for cuts of an additional million barrels a day. Oil prices barely budged. Since late September, the global price of a barrel of oil is down around -20%, despite Saudi and Russian attempts to curb global supply. The latest announcement has a few features that have not – at least to date – had the intended effect of putting upward pressure on oil prices. For one, the cuts are voluntary, and traders do not seem to be convinced that major oil-producing nations like the United Arab Emirates, Nigeria, and Angola are going to sign on. Another factor to consider is that the U.S. is the world’s largest oil producer, and other nations can also step in to add supply to the market to replace lost OPEC+ production. The final factor is global economic demand, which is expected to slow in 2024 as global growth downshifts in response to higher interest rates.⁴

How Two Companies are Largely to Blame for Falling Earnings Estimates – With Q3 earnings season drawing to a close, investors like to scrutinize how companies adjust their forecasts for Q4. In any given year, the expectation is that companies will lower earnings forecasts, usually as a means to lower the bar. Over the last 10 years, for instance, companies have lowered earnings estimates by 1.8%, on average. In Q3 2023, however, S&P 500 companies have cut projections by 3.9%, more than double the 10-year average. Two companies are largely to blame – pharmaceutical giants Pfizer and Merck. Pfizer made a major adjustment to earnings with revenues from the Covid-19 vaccine expected to bring in $9 billion less than anticipated, and Merck reduced forecasts due to a $5.5 billion charge related to a deal with Japanese drugmaker Daiichi Sankyo. The good news here is that if Pfizer and Merck’s estimates are removed from the S&P 500 totals, earnings expectations essentially fall back to the 10-year average.⁵

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