May 1, 2017

Earnings Update – A Great Week!

The Wall Street Journal – U.S. Stocks End Month Higher, Buoyed by Earnings
The S&P 500 is within about half a percentage point of all-time highs and ends the week up 1.5%
U.S. stocks ended the month higher, boosted by strong corporate earnings. The S&P 500 now sits about half a percentage point from all-time highs. With nearly 60% of the companies in the S&P 500 having reported, first-quarter earnings are on track to rise 12.5% from the year prior, according to FactSet. That’s above the first-quarter earnings growth of 9.1% that analysts estimated as of March 31.

Comment

Through Thursday 290 of the S&P 500 have reported Q1 2017 earnings. As the chart below shows, 76% of the 244 companies beat expectations. This is the highest beat rate since 2009.

The better-than-average beat rate has resulted in a nice bump higher in year-over-year earning estimates. As the blue line below shows, Q1 2017 year-over-year operating earnings estimates (290 actual results blended with 210 forecasts) jumped from 10.1% last week to 12.8% this week. The S&P 500 has not seen double-digit earnings growth since Q3 2011. Even ex-energy (red line) earnings estimates had a good week, jumping from 6.6% last week to 8.8% this week. Recall that energy earnings are soaring because WTI crude oil prices bottomed at $26/barrel roughly one year ago (Feb 11, 2016).

Currently, at $50/barrel, energy earnings are rebounding smartly, as we highlighted last week. This rebound will flatten out rapidly over the next few quarters unless crude prices move significantly higher from here. This is why we are making particular note of the ex-energy results here and below.

This past week’s earnings announcements were so good that fiscal 2017 earnings are being revised higher (chart below).

As the next chart shows, earnings estimates typically fall until reporting season starts. Rarely do they ever get revised higher several months before the results are released. Now that results have been announced, however, Q1 2017’s estimates have sprung higher.

Guidance Also Good

Not only were last week’s reports good, but the guidance offered was also positive. The next chart shows the Guidance Index. Its construction is noted on the chart.

Companies typically offer guidance updates with their earnings release. So last week’s flood of earnings results provided a huge amount of new guidance. As the chart below shows, companies are now offering drastically higher guidance than they were just a couple weeks ago.

Revenues Break A Negative String

As the next chart shows, more than 50% of companies are on track to beat revenues expectations. This breaks a string of 10 consecutive quarters where less than 50% of companies beat expectations (red bars). If the current beat rate of 58% holds, it would mark the best quarter since 2011 by this metric.

This decent beat rate has pushed year-over-year revenues expectations (blue line) to a hefty 6.75%. Even ex-energy (red line) leaped to an impressive 4.94%.

As the next chart shows, ex-energy revenues are rebounding smartly. From under 1% in Q3 and Q4 2015, ex-energy revenue growth has been consistently improving.

Conclusion

Since 2015 we have been unimpressed with earnings results. They have not been disastrous, but they have consistently underwhelmed. As late as last week we noted earnings were getting better but also expressed skepticism as ex-energy results had stalled out.

This past week alone 195 companies reported results and they were nearly universally positive. Whether measured by earnings, revenues or guidance, companies came in positive.

210 companies are left to report Q1 results. Historically the longer a company waits to report results, the worse their earnings usually are. Good news is rushed out early in earnings season while companies usually sit on poor results. Even considering this trend, however, Q1 2017 results are on track to be one of the best in many years.