Stocks Can Top All-Time Highs. The Reason: Fourth-Quarter Earnings.

Friday’s November jobs number was supposed to move the market but turned out to be a nonevent. The reason? Stronger-than-expected numbers were offset by revisions to earlier months, the impact of strikes, and other factors. Still, the data suggest that the growing economy can sidestep recession, and that the Federal Reserve might cut rates soon.

Now, the stock market is…waiting. With just a few weeks left in 2023, the S&P 500 has gained 19% for the year and is only 5% from reaching its closing high of 4796, hit in early January 2022. But it clearly needs something that can force sellers, who have consistently come in at just under 4600 to keep the S&P from moving higher, to step away. The market needs solid fourth-quarter earnings.

That should occur. Aggregate S&P 500 earnings are expected to grow by 3.6% to $54.49, while sales should increase by 3.5% per share to $470.35. Those numbers are lower than they were at the end of August, as analysts trimmed estimates to account for a decelerating economy, while earnings-per-share estimates fell 5.2% as many companies offered disappointing outlooks last quarter. The lower estimates, though, mean a lower bar to jump. That’s why, as 22V Research’s Dennis DeBusschere writes, “fourth-quarter earnings could be much better than currently expected.”

Much depends on the economy. While recession fears are heating up again—it doesn’t take much for slowing growth to become a slowdown—real gross domestic product just needs to grow in the low-single digits for the current 2024 S&P 500 sales growth estimate of 5% to look reasonable. Couple that with a moderating increase in costs such as materials and pay, and margins would rise, while stock buybacks would help send earnings up by the estimated 12%, to $244 next year.

The kicker: While the market sometimes ignores EPS beats when the economy is about to take a hit, it rewards beats if growth hangs in. “If we avoid recession, then the S&P is going to have a great year in 2024,” says Tolou Capital Management’s Spencer Hakimian.

Of course, stocks still need to get to fourth-quarter earnings season, which is a month away. In the meantime, the December Federal Open Market Committee meeting, November’s inflation report, and other events need to be navigated. That could add volatility along the way.

But make no mistake—a new high is likely coming. Wait for it.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com