The big tech sector earnings reports on Thursday, October 26th, 2017, led to a big upside day for the NASDAQ on Friday, October 27th, 2017, as the NASDAQ closed the trading day 2.2% higher, its best day since the day after the 2016 Presidential election.
Q3 ’17 S&P 500 earnings will be healthy, and Q4 ’17 S&P 500 earnings will be even better, but as someone who studies the data and writes this post every week, I’m trying to keep an eye on the longer-term earnings estimates.
Financials continue to be the drag in Q3 ’17, as the y/y growth rate of the Financial sector is -7%, thanks to the hurricane-related insurance losses. In Q4 ’17, the Financial sector is expected to generate roughly 15% y/y earnings growth, and that +15% y/y estimate hasn’t changed very much in 6 months, hence, Financials will possibly show their best quarter of earnings growth in the last 5 years in Q4 ’17.
2018 S&P 500 sector estimates – which sectors show the best revisions?
The three data points below represent growth estimates on 10/27, 10/1 and July 1, 2017:
- Financials: +14.7%, +12.2%, and +12.5%
- Technology: +12.1%, +12%, and +11.5%
- Basic Materials: +17.7%, +18%, and +12.7%
- S&P 500: +11.4%, +11.1%, and +11.8%
Other sectors which are holding up:
Consumer Staples: +7.9%, +8.3%, and +8.0%
To repeat a point made here often on this site, it is unusual to see “upward” revisions to forward growth rates this distance from a reporting period. Some companies are likely giving investors the first whiff of calendar 2018 guidance on the Q3’17 conference calls, but the big “guide” will be when Q4 ’17 earnings are reported in January – February ’18.
It is possible that with the House quickly passing their budget one week after the Senate passed their budget, Street analysts are starting to incorporate a boost to S&P 500 numbers from tax reform and cash repatriation. While Microsoft’s stock price got a big bump in Friday’s trade – up 6.5% on 3(x) average volume on fiscal Q1 ’18 earnings,trading to another all-time-high – the fact is Microsoft (NASDAQ:MSFT) is a HUGE beneficiary of any cash repatriation bill since over 90% of Microsoft’s $138.5 billion in cash and short-term investments is held overseas (according to the Microsoft 10-Q).
While it’s my own opinion, I do believe the greater the reality of a tax reform bill, the likelihood the Street will start building SOME influence on tax reform into the consensus estimates. And the fact is that the reality of tax reform is now a little bit higher than two weeks ago given the budget passages. (Another personal opinion is that, given the ACA reform failure and the animosity between the US Senate and the President, meaningful tax reform is still a “show me” proposition. My own guess is Wall Street analysts will need to be assured of a bill passage and have an idea of what's included in the legislation, before lifting numbers.)
It’s possible 2018’s current S&P 500 estimate of $145.69 could be lifted $4 – $6 IF (and it’s still a big if) tax reform legislation is passed, with cash repatriation. (That $4 – $6 estimate is using other research firm’s estimates I’ve seen, and is based on no homework done fundamentally.)
We could see $150 per share in S&P 500 earnings in 2018.
Thomson Reuters data (by the numbers courtesy of This Week in Earnings dated 10/27/2017):
- Fwd 4-Q estimate: $142.10
- P/E ratio: 18(x)
- PEG ratio: 1.78(x)
- S&P 500 earnings yield: 5.51%
- Year-over-Year growth of Fwd 4-Q estimate: +10.18%, vs last week’s +10.13% ( It is nice to see that forward growth rate stay above 10%, now the 3rd “> 10%” reading in the last 5 weeks.)
The S&P 500 is looking at 11% S&P 500 earnings growth this year, it’s best year since 2011’s +15% growth. 2011 saw a 20% correction mid-year too, so big corrections can occur in year with healthy earnings growth.
2018 is expecting +12% S&P 500 earnings growth, and that is likely without much in the way of tax reform upgrades.
Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) report this coming week. (Looking at earnings and revenue estimates for both companies, they look similar to Microsoft, Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) last week.)
Clients remain overweight Technology and Financials and have been for a while.
Preliminary thinking is that client’s Technology weight will have to be reduced into year-end ’17, while looking to add to the Financial sector.
General Electric (NYSE:GE) has been the biggest dog within our Top 10 positions this year. It is truly amazing to me how the Industrial segment and the market in general has done so well, now generating 3% GDP growth, and the GE Board and GE management have managed to “cock up” (to use some Irish / British slang) a company which has a broad exposure to the S&P 500 in general, i.e. Health Care, Aerospace, Real Estate, Energy, you name it.
(Long all stocks mentioned above, with MSFT being the largest stock position over the last 5 years.)
Sometimes, writing this post every week, I feel like a broken record, but clients (and readers) are witnessing the sweet spot of a secular bull market, and S&P 500 earnings are reflective of the US economy, and stable interest rates, and the gradual improvement in global GDP growth.