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The S&P 500 has realized five consecutive quarters of year-over-year earnings growth. Based on the third quarter earnings data so far, it looks as though this trend still has room to run.
So far, 88 of 498 S&P 500 have reported year-over-year sales and earnings growth of 6.8% and 8.5% respectively. Digging still deeper into earnings, reveals that 11 of 68 Technology companies have reported 41% year-over-year earnings growth. Tech has been our favorite S&P 500 sector in 2017 and a top-performer, because of the current U.S. growth accelerating environment. Tech shares (XLK) are up 26% year-to-date versus gains of 15% for the S&P 500 in 2017. It makes sense. Tech companies are highly-tethered to any pick-up in U.S. consumption.
How did we get here? In the video above Hedgeye Macro analyst Ben Ryan takes a closer look. Here are some key takeaways:
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1. COMPANIES HAVE BEEN HANDILY BEATING EARNINGS ESTIMATES. Take Tech for instance. In the second quarter, Information Technology shares beat earnings estimates by 7.3% versus the 5-year average of 3.9%. 2. COMPANIES HAVE NOT BEEN “MANUFACTURING” EARNINGS BEATS BY LOWERING GUIDANCE.“Usually what companies will lower their earnings expectations into the quarter to try to manage the stock reaction by then beating those lower expectations,” Ryan says. That hasn’t happened recently. Earnings revision trends haven’t been this muted since 2011. In other words, companies are sticking with their earnings guidance and beating expectations. 3. COMPANIES HAVE BEEN REVISING UP THEIR EARNINGS GUIDANCE.Sectors like Technology, Financials and Energy have been leading the S&P 500 in upward revisions to their earnings outlook for the next twelve months. That means the P/E multiple looks a lot better on a forward looking basis because the earnings in the denominator keeps expanding, Ryan explains. |
So, with the outlook so rosy, you should be asking yourself, when does this trend start to slow? The earnings “comps” – the numbers against which year-over-year growth is measured – get very difficult for the S&P 500 in the coming quarters.
Here’s the important callout from Ryan:
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“So far those tough comps have not mattered and it looks like you’re going to need steeper base effects before you get off this train for earnings growth accelerating. We think the big tough comparison is going to happen in Q1 of 2018 but you have to remember that’s not going to get reported until March or April.” |
We’ll be keeping a close eye on this one for you. More to be revealed.
