LPL Research - The S&P 500 appears likely to produce double-digit year-over-year earnings growth for the first quarter, powered by energy’s rebound.
The S&P 500 is poised for double-digit earnings growth in the first quarter. Earnings season gets underway this week and corporate America is poised to show a strong increase in its bottom line. The S&P 500 appears likely to produce double-digit year-over-year earnings growth for the first quarter, powered by energy’s rebound from the oil downturn that battered the sector early last year. Last year’s first quarter marked the trough of the earnings recession as S&P 500 earnings fell 5%, setting up an easy comparison for the first quarter of 2017 [Figure 1]. This week we preview the upcoming earnings season.
Thomson-tracked consensus estimates for the first quarter are calling for a solid 10.1% year-over-year increase in S&P 500 earnings. With potential for the roughly 3% upside companies typically generate, that makes growth in the 12–14% range a reasonable expectation. Should earnings growth reach that range, it would mark the fastest pace since the third quarter of 2011. Revenue is expected to rise 7% from the year-ago quarter. We have several reasons to be optimistic:
We see little risk that the S&P 500 fails to deliver a year-over-year double-digit gain in first quarter earnings, although the strong U.S. dollar may potentially curb earnings by 1% or so overall and could lead to some trimming of rest of year forecasts. For the first quarter of 2017, the average U.S. dollar level, based on the U.S. Dollar Index, was 3.5% above the year-ago quarter’s level. Should the dollar stay at its most recent levels, the Dollar Index would be up 7% year over year during the second quarter.
Though not material for first quarter results, we do see risk that tempered policy hopes may lead to some estimate reductions in late 2017 and throughout 2018. The challenges the Trump administration has faced thus far with healthcare reform and the challenges it may face trying to get tax reform through Congress suggest some analysts and strategists who had factored in optimistic policy views may take the opportunity to reduce their estimates a bit. Most tax reform proposals we have seen would boost S&P 500 earnings by 5–10% if implemented, though we believe the low end of that range is more realistic.
Energy will be the biggest contributor to overall earnings growth in the quarter if the sector can match or exceed estimates [Figure 2]. But financials and technology, the sectors with the two biggest weights in the S&P 500, are expected to do more than their fair share by potentially producing mid-teens earnings growth year over year. Financials are likely to benefit from the rise in interest rates over the past year, along with healthy capital markets and credit conditions; help from deregulation is probably coming later in the year (something we will surely hear about this week as several big banks report). Technology earnings should get support from strength in semiconductors and software...