Earnings Estimates Improve The Most In At Least 21 Years
If you’re bullish on stocks because earnings are strong, you are sitting in the catbird’s seat because the estimates have been expanding at an unusual pace. As you can see from the chart below, the 2018 full year estimate has increased since December when the tax cut was passed. Obviously, my discussion about 2018 earnings being trouble in an article a few months ago was completely wrong. Firstly, the dollar has fallen, and oil prices have risen. Secondly, the tax cut has boosted numbers. Unless there’s an unknown negative geopolitical catalyst, I can’t see 2018 earnings being bad. The ultimate decision investors need to make now is if the current estimate for $150.12 in S&P 500 EPS for 2018 fully captures the effect of the tax cut. Generally, earnings estimates fall from here until 13 months from now when all the results are in. However, the final estimates on the effects of the tax cut may not be in. Secondly, positive guidance this earnings season can boost 2018 estimates.
As I mentioned, the earnings estimates usually fall in this period leading up to the beginning of the year. The chart below shows the historical change in earnings estimates from December 20th to January 11th. It captures the period when they increased because of the tax cut passing. As you can see, they fell 17 years and rose 4 years. The highest increase was less than 0.5%, while this year estimates are up 2.2% from $146.83 to $150.12. It’s difficult to determine exactly which analysts, who updated their numbers recently, included the impact of the tax cut. The best way to determine if $150.12 is a good estimate is to come up with your own. One key indicator, which might signal earnings estimates are about to move higher in the next month, is that only 40% of analysts have confirmed or revised their 2018 earnings estimates for the firms in the Dow since December 20th.
70% of analysts have updated their earnings estimates for American Express, JP Morgan Chase, Goldman Sachs, and Travelers. Those companies are in the Dow and S&P 500. It makes sense the financials’ earnings are being updated the quickest because the sector reports earnings at the beginning of earnings season. This explains the chart below which shows the sector breakdown of earnings estimate changes from December 20th to January 11th. As you can see, financials earnings estimates are up 8.3%. Based on this information, it’s safe to assume the other sectors will play catch-up, moving the S&P 500 earnings estimate towards the mid $150s. One aspect to keep in mind is that not all sectors are helped equally. Energy will be helped significantly, while tech isn’t expected to be helped. Anyone complaining about the tech stocks getting a large percentage of capital in 2017, will be pleased to see a more broad-based rally in 2018.
