By LPL Financial
Key Takeaways
The S&P 500 appears likely to produce double-digit year-over-year earnings growth for the first quarter, powered by energy’s rebound.
Last year’s first quarter marked the trough of the earnings recession as S&P 500 earnings fell 5%, setting up an easy comparison.
We have several reasons to be optimistic, including good macro data and resilient estimates.
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.
Overview
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:
Good macro data. Earnings are more manufacturing driven than consumer driven—unlike the overall economy—so the recent strength in the Institute of Supply Management (ISM) Manufacturing Index, which averaged 57 during the first quarter, bodes well for earnings in the first quarter and possibly the second as well. Strong measures of business confidence—including the Conference Board’s CEO confidence survey and the Duke University/CFO magazine business outlook survey—provide positive fundamental data points. Data overseas have also been good and mostly better than expected, based on economic surprise indexes, in what is a fairly synchronized global expansion.
Oil prices are sharply higher. Oil prices averaged $51.80/barrel during the first quarter, putting the quarter’s average price 54% above the average for the year-ago quarter, when crude oil averaged $33.63. Earnings growth returned to the energy sector during the fourth quarter of 2016, but losses in the first quarter of 2016 make the energy sector’s growth contribution significant in the first quarter of 2017; specifically, based on consensus estimates energy could contribute 4% to S&P 500 earnings growth. The potential to approach 10% earnings growth even when excluding the energy sector is encouraging.
Resilient estimates. Earnings estimates have held up well since the start of the year. After a 1.4% drop in consensus S&P 500 estimates for the full year 2017 during January and February (from +12.5% to +11.1%), estimates barely budged from the start of March through the first week of April, slipping just 0.2% to +10.9%. The resilience of estimates reduces the probability of widespread shortfalls. As always we will watch estimates closely during earnings season to gauge corporate optimism and assess earnings growth potential for the rest of the year.
