We’ve chronicled the progression of 4Q earnings rather comprehensively across platforms but we thought it worthwhile to provide a quick visual endcap to the season.
The larger highlights are top down in nature and are summarized immediately below. A more detailed review follows:
- 4Q marked the fastest pace of growth since 2014
- Intra-quarter revisions showed no downward drift for the 1st time since 2Q14.
- Aggregate results showed progressive improvement through the reporting period with earnings and sales growth ending on the highs.
- Base effects and reflation’s peak should drive continued acceleration in 1Q17
- Materials and Industrials earnings and revision trends remain depressed. The narratives are waiting on the fundamental follow through.
- Missing mattered and fundamental forecasting paid handsomely, particularly in calling losers. Declining cross equity correlations and the prospect of higher volatility and larger performance dispersion may continue to support an active management bias.
Ending On The Highs: 487/500 companies in the S&P 500 index have reported for Q4 and the earnings acceleration has only gotten stronger throughout reporting season.
Sales for the S&P comped +4.9% Y/Y in aggregate which is the highest top-line growth rate since Q1 of 2012. Earnings growth came in at +6.3% for the quarter. That’s the highest rate of earnings growth since Q3 of 2014.
From an operating momentum perspective, 56% and 54% of companies have recorded sequential accelerations in sales and earnings growth, respectively.
Estimates, comp effects in cyclicals, rising sentiment and accelerating fundamental macro data collectively suggest a further improvemetn in Q1.
No Negative Revision Trends? Looking at expectations, an S&P 500 earnings beat of +2.6% actually came in well below the 5-year average beat rate of +4.4% , but the more important trend in intra-quarter earnings revisions is an important indication of optimistic inflection.
We all know the typical progression of earnings growth vs. forward estimates. Earnings growth is too optimistic to start a quarter, estimates are revised throughout the quarter until reporting day, and earnings growth beats estimates.
In Q4 of 2016 there was no downward revision to Q4 2016 S&P 500 earnings from the beginning to end of the quarter for the first time since Q2 of 2014.
Valuation | High & Holding: Like muted revision trends in Q4, steady positive revisions to forward earnings has kept a cap on the market’s forward multiple with the S&P 500 +6.2% YTD two months into the year.
Earnings growth for the S&P 500 in Q4 improved throughout the balance of reporting season. A strong Q4 growth rate of +6.3% was just 0.2% shy of pulling the 2Yr comp into positive territory. Q1 of 2017 should be the first quarter since Q3 of 2015 where 2Yr avg. quarterly Y/Y earnings growth rate will be positive:
Godot's Industrialism: Despite all of the optimism surrounding the election outcome and an inflection in industrial and manufacturing data, forward earnings expectations in industrials and materials haven’t yet followed suit.
Forward earnings revisions since the election in industrials are barely positive. In the materials sector forward estimates have actually moved lower and greatly undershot broader S&P earnings optimism over the same time period (chart below). We realized energy is a huge contributor to positive revisions.
With industrials completing its seventh consecutive quarter of negative Y/Y earnings decline, consensus estimates predict earnings growth will be the worst of any sector in Q1 (-5.1%) before rebounding to growth in Q2 of 2017. Q1 numbers will provide a better read on the policy regime shift, but so far narratives are still waiting on the fundamental backfill.
Missing's Mattered: 72% of companies that have missed earnings estimates have gone on to significantly underperform the market (-5.3%) over the subsequent three days. The markets treatment of Sales misses have been similar with 54% of companies missing topline estimates going on to underperform by -4.8%.
Enjoy the Weekend.
Christian B. Drake
@HedgeyeUSA
Ben Ryan
dty
