SP 500 Earnings Look Great: +13.6% y/y growth – How do Forward Earnings Look ?

In two words, SP 500 forward earnings look “pretty good”.

Per Thomson Reuters “This Week in Earnings” Q1 ’17 SP 500 earnings have grown +13.6%, but against an easy compare from Q1 ’16, with 288 SP 500 companies having reported their Q1 ’17 financial results.

Ranked highest to lowest in terms of Q1 ’17 earnings and revenue growth:

  • Basic Materials: +19.6%
  • Financials: +19.2%
  • Technology: +17.7%
  • Health Care: +5.7%
  • Real Estate: +3%
  • Cons Disc: +2.7%
  • Cons Spls: +2.6%
  • Industrials: +2.4%
  • Utilities: -1.0%
  • Telco: -4.6%
  • Energy: 653% (versus a loss last year so the percentage gain is not meaningful)
  • SP 500:+13.6%

Source: Thomson Reuters I/B/E/S This Week in Earnings published 4/28/17

Q1 ’17 Revenue growth: 

  • Energy: +31%
  • Materials: +8.9%
  • Financials: +8.2%
  • Technology: +7.6%
  • Health Care: +6.5%
  • Cons Disc: +5.7%
  • Utilities: +5.5%
  • Real Estate: +4.5%
  • Industrials: +3.8%
  • Cons Spls: +1.3%
  • Telco: -4.7%
  • SP 500: +7.1% 

Source: Thomson Reuters I/B/E/S TWIE

Readers can see Energy’s influence on the quarter, but the majority of Energy sector earnings will come in the next 2 weeks. Exxon and Chevron reported Friday, 4/28/17 and despite seemingly good reports, the stocks faded late in the day. I do think Energy and crude oil are at a critical juncture in terms of price and potential performance. A plethora of good news two weeks ago couldn’t keep crude oil above $50.

So how do SP 500 earnings look for the rest of the year ? 

  • Q2 ’17: +9.3% y/y growth expected vs +10.2% as of April 1, ’17
  • Q3 ’17: +9.3% y/y growth expected vs +9.5% as of April , ’17
  • Q4 ’17: +13.5%, y/y growth expected vs. +13.4% as of April 1 ’17
  • Q1 ’18: +11.6% vs +14.6% as of April 1 ’17.

The key aspect to this data to understand, is the very slow rate of erosion in the forward estimates with the exception of Q4 ’17, which has actually been revised higher in the last 4 weeks, which in and of itself is very unusual.

Thomson Data by the numbers: 

  • Forward 4-qtr estimate: $135.03 versus last week’s $135.12 (Remember, this is through Q1 ’18)
  • P.E ratio: 17.7(x)
  • PEG ratio: 2.15(x)
  • SP 500 earnings yield: 5.66% versus 5.75% last week
  • Year-over-year growth of the forward estimate: +8.21% vs last week’s +8.29%

Analysis / conclusion: remember any “forward” data now includes the period from Q2 ’17 through Q1 ’18, so these are truly forward indicators. The forward growth rate has slowed a little bit from near 10% at the end of March to now the low 8%, which is still reasonable for a market trading at 17(x) earnings.

With the Technology and Financial sector’s investors get 35% – 37% of the SP 500 by market cap, and if we add Health Care, we get half the SP 500’s market cap in three sectors.

Nothing has changed in terms of recommended overweight’s. The SP 500 nearly became as oversold as it did last early November ’16 when it touched its 200-day moving average during this correction, and yet the benchmark corrected just 3%.

The forward earnings look above, portends positively for the rest of the year in my opinion. May through September every year tends to be weak seasonally but the tax plan could complicate a seasonal trade.

Apple, Facebook and Tesla report this week. (Long all 3.) Tesla just broke out of a 3.5 year trading range and I would not like to see a high volume close back below $290 – $291.

It’s not attached but Factset notes that Q1 ’17 is the best y/y earnings growth since 2011. Again remember weak compare vs Q1 ’16. Facset also notes the slower negative revision rate for Q2 ’17.

All good earnings news.

Thanks for reading.

 

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