This Earnings Season is Off to a Flying Start

by: , Portfolio Strategist, MainStay Investments

Based on the first 42 S&P 500 firms to report first quarter results, nearly every company (except Delta and CarMax) has reported profit growth1. When all is said and done, analysts expect profit growth to reach nearly 20%2. It is still early to say, but if analyst expectations are confirmed it will mark the highest earnings growth since the first quarter of 2011.

Quarterly Earnings Growth (%YoY)

Source: Thomson Reuters Datastream. IBES. NYLIM. As of 4/16/18

Admittedly, the large increase is mainly driven by the tax cut, but expectations for revenue growth and EBIT growth are also higher so it’s not just the tax cut driving business here. Sales growth is estimated to top 7%3 – the highest sales since 2012 – reflecting the positive macro environment. Another factor, of course, is the positive impact of foreign currency translations.

Sales Growth

Source: Thomson Reuters Datastream. IBES. NYLIM. As of 4/16/18

Normally, optimistic earnings expectations, like this, portend to poor market performance during the reporting period. This time, however, we would be careful expressing a negative bet on the market. To date, the market is rewarding upside earnings surprises less than average and punishing downside earnings surprises less than average. This is one sign that investors are less concerned with fundamentals, like earnings, and more concerned with macro risks like trade, inflation, and new tech regulation. A very positive earnings season may change that trend.

Bottom Line

We think a positive reporting season could stop the bleeding driven by macro-headline risks. Looking ahead we expect companies to continue to achieve double digit earnings growth throughout 2018. As such equities remain an attractive asset class for us; particularly financials, due to the changing regulatory environment, and our expectation for a near-term steepening in the yield curve.

  1. Bloomberg 4/17/18 11 am
  2. Bloomberg & Factset 4/17/18. Analysis based on bottoms-up estimate
  3. Bloomberg & Factset 4/17/18. Analysis based on bottoms-up estimates

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

S&P 500 is an index of 505 stocks issued by 500 large companies with market capitalizations of at least $6.1 billion.

EBITA is an acronym for earnings before interest, taxes and amortization. To calculate a company’s EBITA, start with its earnings before tax (EBT) and add interest and amortization expenses back in.
Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Funds. Indices are unmanaged, include the reinvestment of dividends, and cannot be purchased directly by investors. Past performance does not guarantee future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for the Strategic Asset Allocation & Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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