What’s More Important than Profits?

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management; Robert Serenbetz, Portfolio Strategist, New York Life Investment Management

The earnings season is underway, and it’s looking solid. Based on the first 154 S&P 500 companies to report for the first quarter of 2018, the average company is beating expectations by 7%, and we are on track for earnings to be at least 20% higher than first quarter last year.

Profit growth could be the highest on record since 2011, a very important confirmation to current valuations. We have discussed some of the drivers of higher earnings like tax reform, currency gains, and growing revenues. But, one crucial factor to monitor this season is business investment.

Business investment, known as capex, has many positives – from immediate effects like greater activity and demand, to longer-term effects such as increased efficiency and productivity.

Business Capex Remains Below Historical Norms

Sources: Thomson Reuters DataStream, New York Life Investments, as of 4/19/18. Past performance is no guarantee of future results, which will vary.

For most of this recovery, many corporations have remained cautious on investments, instead showing a preference for buybacks and preserving cash. The result has been “pent-up” demand for equipment, given a now tight labor market and the rapidly expanding digital economy.

On each earnings call, investors receive guidance from some companies on how they intend to spend their extra profits. Capex guidance provides a long-term assessment of future value creation and the direction for the company. Thus far, capex guidance is at a three-year high – a trend we expect to hold, given faster revenue growth.

Other indicators also point to a likely pick up in capex this year. Business surveys on capex expectations are far above historical norms.

With tax reform favoring capex and repatriation of overseas capital, an acceleration in business investment could underpin sustained growth and extend this economic expansion further.

Capex trends are key to watch for markets this year. Stay tuned!

The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors.
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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.

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Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Multi Asset Solutions (MAS) team. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

Full Bio

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