John Lynch Chief Investment Strategist, LPL Financial
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Companies remained generally upbeat during the third quarter earnings season, based on the LPL Research Corporate Beige Book Barometer. This is hardly surprising, given actual earnings results were good again and estimates of future earnings held up relatively well as companies provided forward-looking guidance.
Positive Sentiment Confirms Earnings Strength
Corporate sentiment remained very upbeat during the third quarter based on our count of positive and negative words in earnings conference call transcripts. We observed a pickup in strong words, little change in the number of weak words, and a resulting increase in the differential between strong and weak words, which remains very positive. Accordingly, the ratio of positive-to-negative words continued its steady climb since the end of the China and oil-driven downturn in spring of 2016. Specifically, from the third quarter of 2016 to the third quarter of 2017, the ratio of strong-to-weak words rose steadily from 2.6 to 7.1.
The improvement in management sentiment is encouraging and consistent with the strong earnings season and generally upbeat guidance. We believe the positive tone from management teams supports our outlook for the potential of more solid earnings gains next year, as noted in our Outlook 2018: Return of the Business Cycle.
Here are some excerpts from call transcripts supporting the positive sentiment on the macro environment:
“With respect to customers, the feedback from discussion with customers is I think pretty optimistic about their prospects, what they’re seeing in terms of demand.” —Vehicle Manufacturer
“As we move into the fourth quarter, the macroeconomic environment looks solid. We also remain confident about the holiday season, as consumer sentiment remains elevated. Looking outside the U.S., global growth projections have moved higher as performance in Europe and China continues to exceed expectations.”—Transport
“The economy from our perspective continues to look steady. Customers continue to be somewhat optimistic, there’s a bit more optimism about fiscal or tax reform and the ability to see that improved growth rates in the economy.”—Bank
Policy Focus Centered on Tax Reform
While the amount of attention corporate management teams have paid to the Trump administration on their earnings calls has fallen in recent quarters, tax reform has continued to get a lot of air time. The tax issue got more attention during the November 2016 election, but mentions in transcripts we analyzed roughly doubled from the second quarter to the third as the bills worked their way through Congress. Specifically, the word “tax” or its variants were mentioned over 400 times during fourth quarter 2016 earnings conference calls before falling to below 70 in the second quarter of 2017 and then rising to 126 last quarter. Mentions of other key policy initiatives were little changed and fairly infrequent, although “infrastructure” got a bump from 18 in the second quarter to 33 in the third.
Here are some executives’ comments on Washington, D.C. policy initiatives:
“I think there will be a good uptick in terms of investment…so I’m pretty optimistic that the new tax law will be a good catalyst for growth.”—Engineering and Construction
“While the economic outlook remains fairly promising, we see further upside potential from U.S. tax reform, which we strongly support. The current proposal will provide great incentives for companies to both reinvest and create jobs at home.”—Transport
“It is important that Washington and the business community unite now behind a tax reform bill that will have a positive impact on domestic jobs and on economic growth. Still remaining optimistic that something on this front can get done, we are not assuming reform in our 2017 guidance.”—Healthcare
“Our commercial clients remain optimistic. They continue to look forward to continued implementation of a pro-growth agenda, particularly focused on meaningful tax reform.”—Bank
“We support a pro-growth tax reform package, a significantly lower marginal rate, and we’re prepared to see certain preferences changed or eliminated. We think that will drive economic growth, which is a key factor in terms of our growth as a company.”—Insurer