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S&P 500 Earnings Expectations Higher for 2018

Strong corporate outlook, sales and earnings momentum are all factors

Analysts tracking company financial results estimate that 2018 will be a banner year for corporate earnings, partly reflecting the lower tax rate from the recently passed tax legislation, as well as expectations for a continued upswing in the global economy.

Through Feb. 16, the 2018 median earnings per share (EPS) estimate for companies in the S&P 500 index has increased 7.0% from year-end 2017, according to FactSet. The aggregate EPS for all companies in the S&P 500 is $157.57 as of mid-February, up from $147.22 as of year-end. FactSet says that the 7.0% increase in the annual EPS estimate over this period of time is the largest since it began tracking the data in 1996.

Companies themselves are also providing upbeat forecasts for their 2018 results. During the same timeframe, FactSet says 127 companies in the S&P 500 have issued positive EPS guidance for 2018 – more than double the 10-year average of 49 companies.

Along with the synchronized global economic recovery, multinational companies are getting a boost from the weaker U.S. dollar, while rising commodity prices are providing materials and industrials companies with more pricing power than they’ve had in recent years.

“We expect earnings to continue to get strong support from accelerating U.S. and global economic growth, a pickup in business spending, and strong manufacturing activity,” John Lynch, LPL Financial’s chief investment strategist, wrote in a Feb. 26 research note.

The current earnings season has been among the best in recent years. According to data from Thomson Reuters I/B/E/S,  fourth quarter earnings and revenues were the strongest in six years. In aggregate, companies are reporting earnings that are 4.7% above estimates, which is above the 3.1% long-term average surprise factor tracked since 1994, and in line with the 4.7% surprise factor recorded over the past four quarters.

In the final quarter of 2017, earnings are expected to increase 15.3% compared to the same quarter a year ago, while revenue is expected to rise 8.2%, Thomson Reuters I/B/E/S says. After excluding the energy sector, which has bounced back significantly from much lower year-ago comparison figures, fourth-quarter earnings and revenues are slated to increase by 13.1% and 7.2%, respectively.

Through Feb. 23, of the 451 companies in the S&P 500 that have reported earnings for the fourth quarter of 2017, 76.5% have reported earnings above analyst expectations, according to Thomson Reuters I/B/E/S. This figure is above the long-term average of 64% and above the average over the past four quarters of 72%.

It’s a similar story for companies’ top-line growth with 77.2% of companies reporting fourth-quarter 2017 revenues above analyst expectations. Again, that is above the long-term average of 60% and above the average over the past four quarters of 63%, according to Thomson Reuters I/B/E/S.

Going into the first quarter of 2018, all 11 industry sectors that make up the S&P 500 are expected to report an improvement in earnings compared to the first quarter of 2017. The estimated earnings growth rate for the S&P 500 for the first quarter of 2018 is 18.2%, though it declines slightly to 16.2% when the energy sector is excluded, the data from Thomson Reuters I/B/E/S show.

Outlooks, though, haven’t all been upbeat. There have been 59 negative earnings per share preannouncements issued by S&P 500 companies for the first quarter of 2018, compared to 46 positive. And while the current landscape may be positive for corporate earnings, risks such as higher interest rates, an unexpected spike in inflation, or a significant decline in commodity prices could be worrisome for corporate results and stock investors.

One indicator market participants are keeping an eye on is movement in the 10-year Treasury note’s yield toward 3.00% and above. Goldman Sachs expects a gradual rise in the yield on the 10-year note to 3.25% by year-end. In recent research, the firm stress-tested how equities would perform if the 10-year note’s yield were to spike to 4.5% by year-end. That would cause a decline of 20% to 25% in equity prices, the firm’s research said, according to this report.

For more on the potential of a bond bear market please read BCJ Financial’s recent research from Benjamin Bimson, our chief investment officer.


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