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Q4 Earnings so far: Key Takeaways

| January 26, 2018

After a bit of a hiatus in the writing department, we are back...and you’ll quickly realize it is Jeff writing here, as the topic is earnings! We hope your year is off to a great start. The equity markets certainly are. We have fielded no shortage of questions about whether this trend in the market will continue. As you know, we don’t have a crystal ball, but we do have good data, and let’s start the year by looking at some of this good data as it relates to Q4-2017 earnings.

  • With 89 S&P 500 members (about 18%) reporting thus far, the big story of Q4 earnings season is the very strong revenue growth on display, especially when one-time charges related to the recently enacted tax reform act are removed.
  • Additionally, we are seeing an above-average proportion of positive surprises and an unusually positive revisions trend for the current and coming quarters.
    Total Q4 earnings for the companies that have reported results are up 8.6% from the same period last year on 7.7% higher revenues, with 81% beating earnings estimates and 74% beating revenue estimates.
  • For Q4 as a whole, total earnings for the S&P 500 index are expected to be up 10.8% from the same period last year on 7.3% higher revenues. Earnings growth is expected to be positive for almost every sector, with double-digit growth for the Energy, Technology, Construction, Industrial Products, Basic Materials and Autos sectors.
    Excluding the Energy sector, where earnings growth will be higher than normal due to weak comparisons to last year, total Q4 earnings for the rest of the S&P 500 index would be up 8.1%. Not as healthy as 10.8% overall, but nothing to sneeze at there.
  • Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up 14.4% on 9.1% higher revenues. Keep that in mind in the context of concerns about overvaluation in the tech space.
  • For the small-cap S&P 600 index, where we have Q4 results from just 8.2% of its members, earnings are up 22% on 15.4% higher revenues so far. The proportion of positive EPS and revenue surprises stand at a very healthy 61.2% and 57.1%. Note that MPCA portfolios retain exposure to the small-cap space.
  • Earnings estimates for the current period (Q1 2018) and following quarters have started going up in a big way, with tax law changes the most oft-cited reason for the positive revisions. The positive revisions are broad-based, with nearly all sectors up over the last few weeks.
  • Putting a bow on the recently finished 2017, total earnings for the S&P 500 index are expected to be up +7.5% on +5.0% higher revenues, which would follow +0.7% earnings growth on +2.5% higher revenues in 2016. Index earnings are expected to be up +16.4% in 2018 and +9.6% in 2019.

Since most of us “think in pictures”, the charts below compare the results thus far with what we have seen from the same group of 89 index members in other recent periods.

While Q4 earnings growth for these 89 companies is tracking below what we had seen from the same group of companies in the preceding periods, the revenue growth pace as well as the proportion of positive EPS and revenue surprises are tracking above historical periods.

The next two charts below show that there is clear momentum on the revenue front, with both the growth pace as well as the proportion of positive top-line surprises tracking above historical periods.

We want to highlight the unusually positive revisions trend for the current and following quarters. The chart below shows how 2018 Q1 earnings growth expectations have evolved since early December. This is a sight that we haven’t seen in a very long time, and certainly not over the last 6 years.

The most important factor driving this positive revisions trend is the tax cuts. The rise in oil prices and the impact of uptrend bond yields on banks’ profitability are some of the other factors.

The final chart below contrasts the Q4 earnings growth rate with what was actually achieved in the last five quarters and what is expected in the coming four periods.

So while it appears that the market is perhaps getting ahead of itself in the very short term, powerful earnings and revenue trends underneath are driving the move higher. We will remain ever vigilant in the weeks and months ahead for signs of gross excess on the domestic front, and remind current MPCA clients that we have been tactically increasing portfolio allocations overseas over the past year to capture more attractive values there.

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