Zacks Investment Management

With the S&P 500 regaining some lost ground from the early February correction, media attention seems to be finally shifting – albeit slowly – back to positive news, specifically earnings season. As our regular readers know, Zacks Investment Management never left the earnings discussion. We have maintained unwavering focus on earnings even at the height of the selling pressure, as our optimistic outlook for the year hinges on stable earnings growth that we think will continue throughout 2018. Zacks Investment Management expects S&P 500 index earnings to be up a firm +20.4% in 2018.

As it stands today, Q4 2017 earnings season has been rock solid, in our view. Total Q4 earnings for the 370 S&P 500 members that have reported are up +14.5% from the same period last year on 8.5% higher revenues, with 77.2% beating earnings per share (EPS) estimates and 75.4% beating revenue estimates. One of the key takeaways for investors here: 77.2% marks the highest beat percentage in a decade.¹

We believe that the standout feature of Q4 2017 earnings season is the clear momentum on the revenue front. As you can see in the chart below, Q4 revenue growth rates are far outpacing the previous quarter and the longer-term averages. The percentage of companies beating revenue expectations in Q4 is also materially higher than previous quarters. In short, U.S. companies are making significantly more money than expected – generally a positive for stock prices. The comparison charts below compare top-line performance for the 470 index members that have reported results already.²

In our view, one of the more critical sectors to watch in any fourth quarter is retail, as it generally serves as a litmus test for the health of the U.S. consumer – one of the most vital components of the U.S. economy. On that front, there’s more good news to report: as of Friday, February 16, we now have Q4 results from 24 of the 39 retailers in the S&P 500 index. Total earnings for those 24 retailers are up +8.9% from the same period last year on +9.4% higher revenues, with 66.7% beating EPS estimates and 79.2% beating revenue estimates. Solid numbers, in our view. ³

For Q4 as a whole, we expect total earnings for the S&P 500 to be up +13.9% from the same period last year on +8.2% higher revenues. Earnings growth is expected to be positive for 14 of the 16 Zacks sectors, with double-digit growth expected for the Energy, Technology, Aerospace, Construction, Industrial Products, Basic Materials, Business Services, and Autos sectors.

For full year 2017, total earnings for the S&P 500 index are expected to be up +7.7% on +4.8% higher revenues, which would follow +0.7% earnings growth on +3.5% higher revenues in 2016.⁴

Looking Ahead

As expected, many U.S. corporations are announcing big one-time charges related to the tax law change, which is making the gap between adjusted operating earnings and GAAP earnings the highest in recent years.

But conditions in the U.S. economy coupled with the tax law change seem to inspire many of these companies to also raise earnings estimates for the current period (Q1 2018) and future quarters this year. The ‘positive revisions’ are broad-based, with estimates for 14 of the 16 Zacks sectors trending higher over the last few weeks. Setting higher expectations also means setting higher sales and earnings benchmarks to reach, but to us, it points to increasing confidence in the U.S. economy.⁵

Bottom Line for Investors

In addition to strong revenue momentum, Q4 has also shown, in our view, a preponderance of positive earnings surprises and positive revisions to earnings estimates. In our view, all of these factors taken together produce tailwinds for stocks, not headwinds. If higher levels of volatility and more pullbacks take hold as we move forward, keeping focus on the earnings picture could potentially offer the respite needed to keep a steady hand.

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