The Bottom Line
- As expected, it’s been a strong earnings quarter for the S&P 500. With only a small percentage of firms still left to report, overall 1Q17 earnings are expected to be up at a double-digit pace year-over-year for the first time since Q3 2014.
- Given the aggressive cost-cutting already done by most large firms in recent years, you’d expect that strong performance to be primarily driven by solid growth in sales—and the chart above suggests you’d be correct.
- S&P 500 sales-per-share—on a trailing twelve-month (TTM) basis just hit a new record high, surpassing the old high from late 2014.
- The relative weakness in sales seen immediately after that previous high was almost entirely attributable to trouble in the energy sector—which has since rebounded, helping to fuel the current increase.
- There are several positive signs for sales growth going forward, including continued acceleration in wages, more jobs, a firming housing market and improving economic growth around the world.
- The Atlanta Fed’s wage growth tracker was up 3.5% year over year in April, its best so far for 2017; and overall jobs growth was solid in April with the employment of millennials growing 3% on a year over year basis relative to just 1.1% for all other age groups.
- In addition, with unemployment claims remaining very low and with some economists projecting that the unemployment rate will decline to 3.5%, more upward pressure on wages could lie ahead.
- The housing market could be a very likely beneficiary. With jobs more plentiful, it’s reasonable to expect more millennials will form households—and buying a home rather than renting was more popular in 1Q17 for the first quarter in more than a decade. It’s no surprise that. the NAHB Housing Market Index, which gauges the level of homebuilder optimism reached 70 in May—a level not seen since 2005.
- And with growth outside the U.S. picking up, S&P 500 companies that sell abroad could see better sales, especially if U.S. dollar strength continues to moderate as it has done in the past month.
Sources: Bloomberg, S&P Dow Jones