First quarter earnings season was excellent by almost any measure. The numbers were strong even without the boost from the new tax law. In this week’s commentary, we recap the outstanding near-complete first quarter earnings season, highlight some of the key themes, and show why a potential peak in earnings growth is not cause for immediate concern.
We expected a strong first quarter earnings season and we got it. Growth was very impressive, with S&P 500 Index earnings growing 26% year over year, the best since the fourth quarter of 2010. Even when excluding the impact of the new tax law (estimated at 6–7%), earnings growth accelerated from the prior quarter and approached 20%. A broad range of sectors produced substantial upside surprises [Figure 1].
Overall, just about any way you slice it, it was an excellent earnings season; other notable highlights:
- S&P 500 earnings have now increased at a double-digit clip four out of the past five quarters.
- The streak of consecutive quarters with earnings exceeding expectations is now 36, based on Thomson Reuters’ data.
- The percentage of companies beating earnings estimates at just over 78% is the highest since FactSet began tracking the data in 2008.
- The magnitude of the upside surprise, at 7.5%, was the biggest since 2010.
- Revenue grew more than 8% year over year, fastest since 2011 (and in line with the fourth quarter of 2017).
- Estimates for the next four quarters rose during reporting season, a relatively rare positive development.
CAUSE FOR APPLAUSE
Why so good? As we pointed out in our earnings preview in April, in addition to the new tax law, several other factors contributed to the strong numbers:
- Better economic growth. Accelerating economic growth in the U.S., based on gross domestic product, helped boost corporate profits. U.S. economic growth was 2.9% year over year for the first quarter (2.3% quarter-over-quarter annualized), above recent trends. Growth remains generally solid around the world too.
- Robust manufacturing activity. The U.S. manufacturing sector is booming, with the Institute for Supply Management (ISM) Manufacturing Index averaging near 60 year to date. Earnings are closely linked to the manufacturing sector.
- Weak U.S. dollar. During the first quarter, the average U.S. Dollar Index level was more than 10% below the year-ago quarter, which propped up overseas earnings for U.S.-based multinationals.
- Higher oil prices. A more than 20% jump in oil prices from the year-ago quarter drove a sharp rebound in energy sector profits.