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Another Strong Start

| April 19, 2018
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Many of our readers are fully aware that earnings reporting season for the first quarter of 2018 (1Q18) is now underway. While it is hard to believe the “New Year” is already 25% gone, here we are, hoping for spring in Seattle to come and stay awhile. Today will highlight what has occurred thus far, with more updates to come in the days ahead.

As we suspected and have been reporting on for several quarters now, earnings are up sharply to start the year and the quarter is off to a great start. With 52 of the S&P 500 companies reporting, representing 17% of the group’s market capitalization, earnings are already up 28% from the same period last year on 10.7% higher revenues. Nearly 85% of those companies are beating EPS estimates and 79% are beating revenue estimates.

This is better performance than we have seen from the same group of 52 index members in previous quarters, both in terms of earnings growth and estimate “beats”. The strong revenue momentum that was a notable feature of the 4Q17 earnings season has continued into 1Q17 as well.

Looking at Q1 as a whole, total earnings are expected to be up just shy of 18% from the same period last year on 7.6% higher revenues, the highest quarterly earnings growth pace in seven years. For full-year 2018, total earnings for the S&P 500 index are track to be up nearly 18% on 5.2% higher revenues, with full-year 2019 earnings and revenues for the index expected to be up 9.5% and 4.2%, respectively.

While we expect strong earnings growth to continue for the foreseeable future, many investors are concerned about valuations. Assuming projected earnings per share for the whole index of $148.13, the market trades at a multiple of 17.6X. For 2019, using projected EPS of 162.24, the multiple is 16.1X. While not dirt cheap by any means, these P/E multiples are reasonable assuming continued earnings expansion. If earnings growth drops off meaningfully, perhaps in an economic slowdown or recession, all bets are off and we will respond accordingly using our rather large basket of leading indicators to guide the way.  

Illustrating the earnings picture with recent comparisons looks like this:

 

 A few quick points.

  •  The earnings growth rate (basically 28%) for these 52 index members is more than double the pace that we have been seeing lately.
  • The Q1 revenue growth rate (up 10.7%) represents an acceleration from recent history.
  • The proportion of positive EPS and revenue “beats” is similarly above what we have been seeing from the same group of companies in other recent periods.

The most notable element of the results thus far is the momentum on the revenue side, as the above points how. This was a stand-out feature of the preceding earnings season as well and we are seeing this trend continue in the Q1 earnings season as well.

Representing strong revenue momentum:

Finally, looking ahead to the rest of 2018 for earnings growth:

It is generally the case that earnings revisions fall as the year wears on and reality intrudes upon rosy expectations, but recently the opposite has been true. Earnings revisions have been positive, not negative, propelling the market upward as actual results exceed expectations. Accordingly, we will be following revisions with interest as the year goes on.

Information from Zacks Investment Research was used in generating this report.

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