Seven Things You Should Know About Earnings

9/4/2017


Earnings season never technically ends. By the time the last July-quarter results hit the market to close out the second quarter, some firms with August quarters will have already kicked off the third-quarter season.

However, fewer than 10 S&P 500 Index companies have yet to report second-quarter results, so by now we have a good picture of the quarter.

For the quarter, the S&P 500 Index is on pace to grow revenue 5.1%, the third-strongest quarterly showing in the last four years, according to Thomson Reuters. Per-share profits are expected to rise 12.1% — a solid follow-up to the first quarter's 14.6% growth, which in turn was the strongest since the third quarter of 2011. Here are seven more facts you should know about the profit picture:

1) In the second quarter, all 11 sectors of the index posted higher profits. The consensus projects profit growth of 6.5% for the S&P 500 in the third quarter, hurt by declines in the telecom and utility sector. Then, in the fourth quarter, profits are supposed to increase 12.2%, with only real estate not managing growth. Telecom, utilities, and real estate are the smallest of the sectors as measured by stock-market value; most of the market is growing.

2) Analyst profit estimates for 2018 suggest all 11 sectors will deliver growth, with eight (consumer discretionary, consumer staples, energy, financials, health care, industrials, materials, and technology) managing at least 8% increases.

3) Both sales and profit surprises were more common than usual in the second quarter. About 69% of S&P 500 companies exceeded revenue targets, topping the long-run average of 59% and the average of 56% over the last four quarters.

Nearly 74% of the companies topped profit estimates, versus 71% over the last four quarters and 64% over the last 20-plus years. While the surprises are encouraging on a stock-to-stock basis, the S&P 500 Index is roughly flat with levels at the start of July, suggesting investors weren't overly impressed with the quarter as a whole.

4) The energy sector, coming off extremely low profits a year earlier, has juiced results. The S&P 500's second-quarter profits would have grown 9.4% without energy's contribution.

5) Full-year profit estimates for the index components equate to nearly 12% growth this year and nearly 11% growth next year. Analysts are notoriously optimistic, and in past years we have frequently called into question their rosy growth targets. However, coming off two quarters of solid growth, with interest rates still low and inflation under control, the possibility of double-digit profit gains in both 2017 and 2018 no longer seems far-fetched.

6) In each of the last six weeks, more analysts have revised S&P 500 companies' full-year profit estimates higher than have cut them. Such periods of rising optimism aren't uncommon. But for the previous two months no trend had been apparent, with negativity more prevalent in some weeks and positivity in others.

7) Negative preannouncements for the third quarter outnumbered positive preannouncements by a ratio of 1.5-to-1, below the ratio of 2.2-to-1 at this time last year. Since 1995, negative preannouncements have outnumbered positive news by a ratio of 2.8-to-1.

Our overall take on earnings season is somewhat positive, and both analysts and corporate executives seem more optimistic than usual. While only time will bear out whether such optimism is justified, the U.S. economy continues to grow at a steady pace. In addition, the combination of a cheap dollar and a pickup in global growth provides a reason for confidence in companies that sell to overseas markets.


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