Third quarter (Q3) earnings are expected to see growth of 17.7% over the year for the S&P 500 as a whole, while revenues rise 7.2%. If we see double-digit earnings growth, then this will be the sixth of the past seven quarters of such strong performance from US firms.
Q2 earnings rose 27%, while sales were up 11%, and corporate profit margins hit a new record high of 11.4%. Earnings continue to rise faster than the S&P 500 itself, a sign that this bull market is being driven higher by corporate earnings, and not the chimeras of quantitative easing (QE) or stock buybacks. Overall, earnings are expected to rise 21% in 2018 compared to 2017, with oil prices providing a boost to the energy sector and US tax cuts helping to improve performance for the S&P 500 as a whole.
Crucially, estimates for Q3 have been steadily revised lower since May, which compares with the positive revisions seen for previous quarters. While this may sound negative, weaker earnings forecasts do at least allow for positive surprises. This is not necessarily a good thing, and the usual suspects will whine about ‘manipulated’ outlooks, but the trend of earnings is clearly higher, and that is a positive for equities, at least in the US.
The outlook is, of course, ‘clouded’ by a number of factors, although that sentence could have been written at almost any time in the past eight years of the post-2008 bull market. Questions persist about several issues:
- Trade wars – a US/Canada/Mexico deal seems to be on its way to completion, but the bigger clash with China, and even the one with the EU, has yet to be settled. Markets are still worried about trade wars, but signs of fresh earnings growth will provide reassurance that US stocks at least are managing to weather this crisis
- US dollar strength – once the dollar was a tailwind for US companies. A lower dollar boosted export performance, but now the higher greenback acts as something of a headwind for US exporters, although its impact is diminished to some extent given how large the internal US market is
- Eurozone debt worries – Italy’s government seems keen on setting off eurozone crisis mark two, and while this will not immediately hit US earnings, it may be flagged as a possible risk to performance in coming quarters, hitting sentiment
But the overall outlook is still positive. Earnings growth is strong, key sectors such as energy should continue to see a rebound thanks to the ongoing rally in oil (expect higher crude prices to get a mention in some earnings calls as a reason to worry though) and US consumers are now seeing further pay rises. Amazon’s decision to boost its minimum wage to $15 per hour should also set off a round of increases for many in the retail sector, boosting consumer consumption.