Earnings: What’s driving expectations?

Written by: Global Thought Leadership | February 24, 2017
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Source: Bloomberg, as of 2/16/17. Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • With nearly 90% of companies reporting as of February 16, 2017, S&P 500 earnings for 4Q16 appear on track to be higher on a year-over-year basis for the first time since 1Q15.1
  • If things play out as expected, S&P 500 earnings for calendar year 2016 will total $106.86—up from $100.45 in 2015.
  • That’s still nearly 7% below the all-time peak of $114.51 set in 3Q14—but if current forecasts are correct, that milestone could be surpassed in 2Q17, when 12-month earnings are expected to reach $118.82.
  • Of course, earnings expectations are merely forecasts—but there are some potential positives that could ultimately underpin stronger future earnings.
  • For one, expected reductions in corporate taxes and regulation could add to some bottom lines in the quarters ahead—even if policy doesn’t change as quickly as some hope.
  • And some companies may be beginning to see improved pricing power, which has been quite elusive. Embedded in January’s report on producer price inflation—which was hotter than expected—was a big increase in core crude materials prices, up nearly 18% year over year, the biggest jump since September 2011.
  • These prices are often viewed as proxy for earnings growth, because they capture the ability of companies delivering goods used at the beginning of the production process to raise prices. If others along the production chain are able to realize price increases as well, then earnings may benefit.
  • Also helping bolster earnings would be stronger wage growth and better quality jobs (higher paying/full-time)—not an unreasonable hypothesis in a fairly tight labor market.
  • All of the factors mentioned above would be consistent with expectations for a pickup in stronger nominal GDP growth—and thus potentially better corporate revenue and earnings growth. That said, they might also raise the probability of tighter monetary policy that could offset some of the current optimism.
  • This could mean more volatility in the equity markets than has been seen recently—making an active, flexible investment strategy and a selection process focused on fundamentals at the individual company level a paramount consideration for investors today.

 


1 All data referenced is from S&P Dow Jones as of 2/16/17.

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