Looking Better, Living Longer, Having More ….
Those are the 3 broad categories in which almost every New Year’s Resolution can be bucketed.
You know what they say about resolutions … in one (y)ear and out the other.
Anyway, with 6 consecutive quarters of GDP accelerating now in the books, the longest stretch of low volatility, risk-adjusted returns of the cycle and a step function increase in forwards earnings estimates (& a step function lower in forward multiples) to close the year, markets have successfully completed the Better/Longer/More Resolution trifecta in 2017.
We expect the positive 2nd derivative party to last a little bit longer.
Corporate profitability, meanwhile, remains a reflection of the broader top down reality and with roughly a quarter of SPX constituents having reported, the underlying earnings mojo remains longer lasting and better looking as well.
Below is a quick visual and bullet-point tour of the notable highlights across earnings season to date.
Have a great weekend.
- Earnings Growth: With 133/500 companies having reported earnings so far for Q4, sales and earnings growth are +8.0% and +10.9% Y/Y respectively. The Y/Y comp from Q3 to Q4 2017 is steeper, and those comps get most difficult in Q1. Regardless, the two-year comp is running hot at +8.6%, which is the steepest 2yr quarterly trend in 3 years. In other words, the underlying trend continues to improve in the face of steeper year-over-year compares.
- Broad-Based Momo: At the sector level, growth accelerating remains broad-based. Sales growth has accelerated in every sector, and earnings growth is positive in very sector with the exception of Industrials
- Operating Momentum: 72% of companies have reported a sequential acceleration in sales growth – tracking at the highest level we’ve seen in years.
- Sales Growth Surprises: Sales growth trends may be the ultimate, pure-play growth accelerating indicator. Running at +8.0% Y/Y, Aggregate sales growth for the S&P 500 has so far beat estimates by 1.2%. Like the 2yr earnings growth rate, this is the widest sales beat margin in 3 years.
- Information Technology Earnings: Earnings growth continues to crush expectations for the fourth consecutive quarter despite the steep upward revisions for the sector as a whole. Information Technology earnings have so far beat estimates by 8.1% compared to a 5-yr average of 4.4%. Earnings beat rates for the S&P 500 in aggregate have come in lower than average at just 2.2%
- Muted Forward Multiple Expansion: Double Digit earnings growth that is shooting below estimates reveals something about forward expectations despite very difficult comps in Q1 (+14.6% growth in Q1 2017). The market’s forward multiple is less than a turn above where it was a year and 23% ago. If you have listened to us for more than a day, you know we believe run-of-the-mill multiple math has some holes. At some point expectations will create opportunity in overshooting, but we’re not making that call today.
