Personal Finance

Ask a Fool: What's Supercharging Earnings Growth This Year?

Q: I know the economy is doing well right now, but it seems like earnings growth has been really strong -- almost too good to be true. What am I missing?

If you've been following some of the earnings releases in recent weeks, you may have noticed some pretty outstanding growth numbers, such as 40%, 50%, or even more earnings growth over the past year. Even some companies that generally put up low-double-digit growth in strong years are increasing profits rapidly.

However, in many cases the growth isn't quite as stellar as it appears.

The reason we're seeing some astronomical earnings growth rates is a combination of actual business growth and the effects of tax reform -- specifically, the reduction in the corporate tax rate from 35% to 21%.

For example, Bank of America recently reported second-quarter earnings that grew by a staggering 43% from the same quarter last year. However, only a small portion of this was fueled by revenue growth and expense reductions -- the majority was because of the bank's effective tax rate falling from 37% to 20%.

So when you see great earnings growth in 2018, it's important to look beyond the headline earnings number. Did the company's revenue grow? Did expenses (other than taxes) drop significantly?

To be clear, most companies are doing quite well in terms of growth -- but they aren't growing quite as fast as the earnings numbers indicate.

Offer from The Motley Fool: The 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor , has tripled the S&P 500!*

Tom and David just revealed their ten top stock picks for investors to buy right now.

Click here to get access to the full list!

* Stock Advisor returns as of June 4, 2018.

Matthew Frankel owns shares of BAC. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Personal Finance Videos

    #TradeTalks: A Holistic Financial Picture to Give a True Indicator of your Financial Health

    Harvest Founder Nami Baral joins Jill Malandrino on Nasdaq #TradeTalks to discuss the Harvest PRO Index, holistic financial picture to give a true indicator of your financial health, not just a credit score.

    Oct 9, 2020

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More