2023 In Review
It’s hard to believe we’re already in the last month of 2023 and gearing up for the New Year. From navigating economic uncertainty, bank failures, geopolitical tensions, wars, interest rate hikes, and much, much more, it was certainly a year to remember marked by resilience, conflict, innovation, and adaptability.
As we always do, we kept our finger on the pulse of the Street, uncovering and reporting on emerging trends and shifts in sentiment to deliver to you, our esteemed clients, actionable insights and data-driven advice. Thank you for your partnership and trust.
What the Data Told Us
Heading into 2023, our Inside The Buy Side® Earnings Primer® data indicated that while bearish sentiment had thawed from the lows we saw in in September 2022, most investors continued to characterize their view as Neutral to Bearish or Bearish amidst broad-based expectations for slowing growth and a recession. In addition, perceived executive tone registered its most downbeat level since the onset of COVID-19 and was perceived to be more negative than investors — clearly indicative of the conservatism senior leaders injected into the markets at the top of the year.
However, as the year progressed and the S&P 500 recovered from the September 2022 lows, overall pessimism across both investors and executives receded though optimism remained largely elusive.
As we close out 2023 and set our sights on 2024, our preliminary Q4’23 Earnings Primer® finds that sentiment is finally beginning to show a greater degree of bullishness than we have witnessed all year, especially among investors.
Indeed, in an analysis of all the qualitative feedback we received throughout our surveys, concerns shifted from squarely negative — with fear focused a year ago on inflation and interest rates — to more neutral as investors worked through concerns around slowing growth and challenged margins.
Why Was 2023 Better Than Expected?
While much has been said about what many expected to occur this year, 2023 saw the tech-heavy S&P 500 claw back much of what it lost in 2022 thanks to the ever-increasing buzz around artificial intelligence (more on AI chatter below), while the small-cap Russell 2000 struggled to regain ground until very late in the year. International stock indexes were mixed as well. Japan’s Nikkei was a standout on the positive side, while the Shanghai Composite in China continued its descent in 2023 following a series of setbacks, including a muted economic reopening, heightened geopolitical tensions, and a property crisis, to name a few.
But what led to the shift away from the doomsday forecasts we saw coming from many on The Street toward the end of 2022? We attribute this to three drivers:
- Proper expectations management, with tone and guidance conservatively set at the top of the year
- Negative macro sentiment pushed into 2024 amidst better-than-expected economic growth in 2023
- Consumer resilience supported by high employment levels
1. Proper Expectations Management, with Tone and Guidance Conservatively Set at the Top of the Year
This properly anchored analyst expectations and set the stage well for outperformance as the year progressed. Consequently, an impressive 82.8% of S&P 500 constituents reported earnings above analysts’ expectations in Q3’23, surpassing both the 1-year average of 75% and 5-year average of 77%. Interestingly, Q3’s earnings beat rate represented the highest percentage of companies beating consensus estimates since the second quarter of 2021, with an average surprise factor of +7.1%.
As we approach the beginning of the Q4’23 reporting period in one short month, more than half, 57%, of the S&P 500 have raised bottom-line guidance forecasts throughout 2023.
2. Negative Macro Sentiment Pushed into 2024 Amid Better-than-Expected Economic Growth in 2023
Perhaps the darling of 2023, artificial intelligence swept the imaginations (and web browsers) of much of the world in its formal debut to the everyday user. However, it was hardly contained to the average consumer — AI mentions by North American companies ballooned this year, serving to buoy the tech-heavy NASDAQ and, to a lesser extent, the S&P 500, which are both likely to finish in positive territory this year.
However, the party wasn’t contained to just Tech stocks. In fact, over the past year, 80% of artificial intelligence mentions have come from sectors outside of Tech, including roughly one-third coming from Industrials and Financials sectors.
As such, the likelihood of a recession in 2023 — as indicated by the views of surveyed investors and analysts as a part of our Inside The Buy Side® Earnings Primer® — slowly waned as the year progressed, with more and more respondents pushing expectations into 2024. Moreover, those not expecting recession at all increased from just 12% in Q1’23 to 45% in our preliminary Q4’23 Earnings Primer® findings.
Below, we compiled some of the shifting commentary surrounding a potential recession throughout the year as cited by investors.
Bolstering this shift in sentiment, U.S. real GDP continues to clock in impressive performances. In Q3’23, U.S. GDP growth produced a blockbuster 5.2% annual growth rate after being upwardly revised from the initial 4.9% from the Commerce Department. This accounts for much of the summer spending spree, bringing us to our third and final point: consumer resiliency.
3. Consumer Resiliency Supported by High Employment Levels
As is usually the case, the strength of the consumer has continued to surpass expectations. Inflation-adjusted (real) consumer spending has continued to grow despite waning stimulus benefits, and the latest CPI print and trendlines indicate the Fed has successfully wrangled much of the breakneck inflation we saw in 2021 and 2022.
The lynch pin holding up the consumer is continued strong employment, which to-date has not been as materially affected as expected by the Fed’s interest rate hikes. Unemployment levels are still hovering around 50-year lows, and U.S. companies have hired about 2.5 million workers this year.
Another bright spot, while we have seen a widening bifurcation between the lower- and higher-income shoppers in our coverage of executive commentary throughout the year, 26% of investors expect consumer confidence to improve over the next six months according to the preliminary findings of our Q4’23 survey, up from just 8% last quarter. This is something we will continue to monitor closely in the coming months as consumer credit card debt continues to escalate relative to savings, implying further potential stress especially on lower-income consumers in 2024.
In Closing
The year brought forth a wide range of challenges and opportunities. It’s important to note that out of the three factors we identified as contributing to a better-than-expected 2023, one of them is squarely within your control: expectations management.
As is the case entering every new year, the Street will be expecting annual guides to be set with confidence and conservatism. While there remain real headwinds and mixed growth signals, the stage is set somewhat differently than it was a year ago. We’re already seeing growing optimism among investors as we close out a stronger-than-expected 12-month period, which has the potential to tilt glasses toward half full, compared to the “brace for impact” narrative we heard the same time last year.
In case you missed it, a link to our full piece on guidance strategies and best practices can be accessed here.