What Will be the SP 500 Earnings “Underbid” This Quarter ?

Q4 ’17 earnings start tomorrow with the big banks, and the question always is,”what will be the actual SP 500 earnings growth rate relative to the expected 11% y/y growth this quarter ?”

Jeff Miller, the great blogger over at “Weighing the Week Ahead” and A Dash of Insight, wrote a piece several months ago, noting that the “underbid” for a typical SP 500 earnings quarter is 3% – 5%, meaning that we should add 3% – 5% to starting rate as of Jan 1 ’18, and that will get us pretty close to the actual earnings growth rate.

Here is my two cents: it wont be that easy this quarter with the changes in the deferred tax asset and then any subsequent boost from share repurchases after December 22nd, or the date the Tax reform bill was signed.

I think these Q4 ’17 reports will quite “noisy” and analysts will have to adjust numbers to reflect operating results.

The other thing to note too is that I think the deferred tax assets / liabilities and any charges, will be “non-cash” and more GAAP related.

Last weekend’s blog post noted that these forthcoming earnings reports will be loaded with – not just tax reform ramifications – but the first look at 2018 guidance.

Readers could see higher volatility around stock prices with earnings releases, maybe more so than usual.

My guess is too that the “underbid” will be towards the higher 5% end for Q4 ’17 judging by some of what we are seeing with corporate actions like Wal-Mart this morning.

While its really geeky accounting, the deferred tax asset¬†writedown is interesting: usually companies or sectors like semiconductors (Micron for example) or homebuilders – sectors that run operating losses for 6 – 8 quarters at a time –¬† carry deferred tax assets so that when the companies return to profitability, the operating losses are used to offset net income and the companies have an artificially low effective tax rate for recovery periods, as past losses offset profitability. ( This is no way shape or form a tax opinion, and I am not an accountant or tax professional. However as an analyst / investor, I’ve come across the deferred tax assets in the homebuilders following 2008 – 2010 and then saw the big EPS write up once the auditor saw that the homebuilder was going to return to a more normal state of profitability.)

It will be interesting to watch how full-year 2018 SP 500 EPS estimates change as we move through next week. 2 months ago, I thought $150 in EPS for ’18 was “doable” but that seems like a statistical certainty with the current estimate around $148. Some are saying we might see $160.

Prepare for volatility around SP 500 earnings and note “operating” results, amidst the noise.

Here is a spreadsheet prepared about 6 – 8 weeks ago showing which large-cap Tech companies could benefit from cash repatriation. While everyone knows about Apple, less know about Cisco or Qualcomm. Cisco could repurchase 1/3rd of their market cap from repatriated cash. (Long Apple, small amount of Cisco, may own more.)

Cisco will report their quarter on February 14th or Valentine’s Day.

Thanks for reading.




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