Earnings growth in the ongoing Q4 earnings season is on track to reach its highest level in 8 quarters, a big part of which is strong results from the major banks and brokers. The growth picture, at this relatively early stage in the reporting cycle, starts looking a lot less impressive on an ex-Finance basis. That said, Q4 earnings growth is expected to remain positive, with or without the Finance sector. This would follow the first positive earnings growth in Q3, which brought an end to the earnings recession.
Expectations remain high that the Trump administration's policies will benefit the overall earnings picture. Regulatory changes like the Dodd-Frank legislation, tax reforms and improved domestic economic growth resulting from increased infrastructure spending should help corporate earnings. But the timing of these changes remains uncertain due to the nature of Congress's working. Given this, it is reasonable to expect these policy changes to have taken concrete shapes by the time we reach the second half of the year. As such, the full earnings impact of the Trump administration should start showing up in estimates for the back half of the year and full-year 2018.
Please note that the market was looking for double-digit earnings growth in 2017 and 2018 even prior to November 8 th . So, the post-election earnings bump will be incremental to current expectations. That said, we have started seeing some effect of the new administration in earnings results already, particularly in the Finance sector's strong Q4 growth numbers. The post-election rise in interest rates and volatility, coupled with increased investor risk tolerance, helped drive trading volumes for most of the major banks and brokers. This juiced up the Q4 results from Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM) and others, with the trend continuing into the current period.
With respect to the Q4 earnings season scorecard, we now have results from 80 S&P 500 members that have reported as of January 24 th . Total earnings for these 80 index members are up +5.1% from the same period last year on +1.9% higher revenues, with 71.3% beating EPS estimates and 52.5% beating revenue estimates.
Relative to other recent periods, this is better earnings and revenue growth performance than we have seen from the same group of 80 index members. As mentioned earlier, the Finance sector is a big contributor to the aggregate growth picture at this stage. For the Finance sector, we now have Q4 results from 50.25 of the sector's total market cap in the S&P 500 index. Total earnings for these Finance sector companies are up +12.6% from the same period last year on +2.5% higher revenues, with 69.2% beating EPS estimates and 46.2% beating revenue estimates. Excluding the Finance sector from the results thus far, total earnings for the rest of the S&P 500 companies that have reported would be down -0.4% from the same period last year on +1.6% higher revenues. This is still better growth than we have seen from the same group of ex-Finance S&P 500 members.
Unlike the growth picture, positive surprises for this group of 80 index members are tracking below what we have seen in other recent periods. It will be interesting to see if this trend continues in the coming days as the Q4 reporting season ramps up.
Looking at Q4 as a whole, combining the actual results from the 80 index members that have reported results with estimates from the still-to-come 420 companies, total earnings for the S&P 500 index are expected to be up +5.1% from the same period last year on +3.7% higher revenues. Excluding the Finance sector, the Q4 earnings growth drops to +1% on +4% higher revenues.
The growth pace is expected to ramp up notably in the current and following quarters. For 2017 Q1, total earnings for the S&P 500 index are currently expected to be up +9.1% from the same period last year, which is a drop from +9.5% a few weeks back. It is typical for 2017 Q1 estimates to be coming down at this stage of the 2016 Q4 reporting cycle, but a lot will depend on the pace and magnitude of those negative revisions.
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