Earnings to push the S&P higher
Heading into the peak weeks of the second quarter, earnings season and the S&P 500 are challenging their January highs. Now, investors are wondering if these earnings releases will be enough to lift the equity markets to new record highs.
The S&P 500 is poised to post its strongest annual, non-recession earnings growth since 2003 and 2004.
- For the second quarter in a row, earnings per share (EPS) looks poised to be 20% higher than this time last year.
- Forty seven S&P 500 companies have issued positive EPS guidance – the second most since 2006.
- Sales and operating income growth is robust.
- All eleven sectors are reporting (or are projected to report) year-over-year growth in revenues. Revenues are expected to grow at 9%.
Sources: Factset, as of 7/18/18. Past performance is no guarantee of future results. Earnings estimates are only estimates computed by FactSet and can vary. An investment cannot be made in an index.
What to watch
Company commentary will be worth watching this quarter. Executives are likely to provide more details around where they plan on spending cash freed up from growing revenues, changes in the tax code, and repatriation. Three factors may put downward pressure on margins and therefore will be important to watch in this earnings season:
- Foreign exchange: The dollar has experienced significant volatility over the past year – moving 6% higher over the last three months alone. Many S&P 500 companies have indicated that dollar volatility has had either a negative impact on earnings or revenues in Q2, or is expected to have a negative impact on earnings and revenues in future quarters.
- Operating costs: As global demand has ramped up, so has the cost of shipping and logistics. When business owners also factor in the effects of a tighter labor market (higher wages), some businesses are experiencing downward pressure on margins.
- Trade wars: Very few companies have noted an effect from tariffs, but some companies using tariffs as an excuse for weak performance may garner more attention this season.
The earnings may be enough for the equity markets to forget about the headline risk and push to new highs. That said, record earnings are unlikely to be distributed equally across all companies. As a result, we expect earnings dispersion could be quite high.
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Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.
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