The fourth quarter of 2023 is turning out to be a surprising highlight in the corporate world, defying expectations and delivering robust profits. Despite high rates and still-high inflation, companies are reporting earnings well above projections. However, there is a caveat. Let’s discuss the matter in detail.

Factors Driving Strong Earnings

Easing Input Costs and Cost Control

One key factor contributing to this earnings surge is the easing of input costs, allowing companies to bolster their bottom lines. Moreover, a renewed focus on cost control and operational efficiencies has played a pivotal role in enhancing profitability.

Reduced Expectations

Another contributive factor is the tempered expectations at the beginning of the earnings season. These helped companies to record solid and high number of earnings beats this reporting season.

Notable Earnings Surprises from Leaders in the S&P 500

Several influential S&P 500 companies have outperformed expectations during this earnings season. Notable names include Amazon, Meta, Apple, Chevron, ExxonMobil, Merck, and Bristol Myers Squibb, collectively propelling the growth rate for Q4.

Caveats to Strong Q4 Earnings

Lowered Expectations Even for Future Outlook

Despite the strong Q4 results, the outlook for future quarters remains uncertain, lacking positive momentum. Although the earnings picture has improved since the start of 2024, results are still far below what Wall Street had expected just four months ago.

Moreover, both first-quarter and full-year 2024 earnings estimates have declined since January 1st, as many companies have issued cautious guidance during this earnings season, as quoted on CNBC.

ETFs to Play

Against this backdrop, below we highlight a few rock-solid ETFs that could help investors weather this edgy scenario.

Roundhill Magnificent Seven ETF (MAGS Quick QuoteMAGS - Free Report) ) – Up 11.7% this year

Recent financial results from major tech companies like Microsoft, Meta Platforms, and Amazon have reiterated their market leadership. Excluding Tesla, which saw its fourth consecutive quarter of underwhelming results, the other 'Magnificent 7' stocks - Apple, Alphabet, Nvidia, and Tesla - reported strong growth in Q4. While market reactions to Alphabet and Apple were lukewarm, their Q4 earnings grew by +51.8% and +13.1%, respectively. Apple also returned to revenue growth.

Technology Select Sector SPDR ETF (XLK Quick QuoteXLK - Free Report) – Up 8% this year

The technology sector has also demonstrated its strength. About 36.4% of S&P 500 companies reported earnings so far. These companies reported 19.3% earnings growth (with a beat ratio of 82.1%) and 6.6% revenue growth (with a beat ratio of 75%), per Earnings Trends issued on Jan 31, 2024. This showcased the sector's ability to thrive in dynamic environments.

Consumer Discretionary Select Sector SPDR ETF (XLY Quick QuoteXLY - Free Report) – Flat this year

The sector has particularly excelled during this earnings season, with an impressive 71.4% of companies beating earnings and revenue estimates. Profits have surged nearly 57% on 8.3% higher revenues, indicating resilience.

Health Care Select Sector SPDR Fund (XLV Quick QuoteXLV - Free Report) – Up 2.3% this year

In the healthcare sector, about 76.9% of companies have surpassed earnings expectations and 92.3% companies have beaten revenue estimates. However, the companies that have reported so far have recorded 17.6% earnings decline though there was 5.8% growth in revenues.