Home Markets U.S. Corporate Earnings Surprise to the Upside in Q4

U.S. Corporate Earnings Surprise to the Upside in Q4

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After years of dismal growth, U.S. corporate earnings are back in positive territory, a sign that improving economic conditions were finally translating into a stronger bottom-line for publicly-listed companies.

As of February 17, companies listed on the S&P 500 were on track for a blended earnings growth rate of 4.6% in the fourth quarter of 2016, according to financial research firm FactSet. That’s based on 82% of S&P 500 companies that have reported actual results to date. FactSet says 66% of companies have reported earnings that were above the median estimate, while 53% have beaten on revenue forecasts.

Back in December, the firm predicted blended earnings growth of 3.1% in the fourth quarter.[1]

If the numbers hold, Q4 would mark Wall Street’s second consecutive quarter of year-over-year earnings growth. That followed five straight quarters of year-over-year decline – Wall Street’s worst earnings recession since the financial crisis.[2]

While clearly in recovery mode, U.S. corporations are benefiting from a low-base effect, where small absolute changes are reflected as big percentage gains due to lower comparative figures.[3] For years, companies have struggled with weak economic growth and a stronger U.S. dollar. Both factors have hurt profitability, especially for multinationals conducting the bulk of their business abroad.

U.S. President Donald Trump has promised businesses “phenomenal” tax cuts in an effort to get more of them to repatriate profits and reinvest in American operations. The new administration has also pledged sweeping deregulation and up to $1 trillion in infrastructure spending over the next ten years. These promises have sent U.S. equities to record highs, with financial and materials stocks among the biggest gainers.

The outlook on the global economy is also improving, although growth remains uneven in many parts of the world. Last month, the International Monetary Fund (IMF) predicted the world economy to expand 3.4% in 2017, following 3.1% growth last year. The Washington-based lending institution raised its 2017 growth outlook on advanced economies to 1.9% from 1.8%.[4]

The U.S. economy expanded at a slower than expected 1.9% year-over-year rate in the fourth quarter, the Commerce Department said last month. However, recent data on manufacturing, jobs and consumer spending suggest the economy is gaining momentum at the start of 2017. Consumer inflation also rose in January to its highest level in nearly four years, underscoring the economy’s resilience.[5]

A stronger domestic economy benefits businesses that are tied to the American consumer, making sectors like consumer discretionary, consumer staples and financial services especially attractive from an investing perspective. Consumer spending accounts for more than two-thirds of U.S. economic output.

Corporate earnings results continue next week, although the attention will be mostly on European banks. Barclays (BCS), HSBC Holdings (HSBC), Lloyds Bank Group (LYG) and Royal Bank Scotland (RBS) are all scheduled to report.

[1] FactSet (February 2017). Earnings Insight: Key Metrics.

[2] John Butters (August 26, 2016). “S&P 500 Earnings Decline for Fifth Consecutive Quarter.” FactSet.

[3] Yvonne Tan (February 18, 2017). “Corporate earnings to recover this year.” The Star.

[4] International Monetary Fund (January 16, 2017). World Economic Outlook Update: A Shifting Global Economic Landscape.

[5] Aaron Hankin (February 15, 2017). “U.S. Inflation Hits Four-Year High.” Investopedia.

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