Global stocks are trading at record highs as investors enjoy what can only be described as a Goldilocks market environment of synchronised global growth, low interest rates and rising corporate earnings.
And this week it’s the last of these three factors that is in the spotlight. US earnings season arrives but four times a year and the Q4 numbers look set to be extremely positive. But will indices – which are already at all-time highs – be able to move higher on what is widely expected to be a bumper earnings season on Wall Street?
Record highs for indices
For most traders the performance of individual stocks matters less than the overall impact on the indices they are part of. The context of this month’s earnings bonanza is important and shows that expectations for earnings growth and stock market performance has not been this high years.
First, all four major indices – the Dow Jones industrial average, S&P 500, Russell 2000 and the Nasdaq 100 – have got off to a stellar start to 2018, each notching one record high after the next.
Through Tuesday (January 9th) the S&P 500 managed to record six straight record closes – something it hasn’t done since 1964. All the momentum from 2017 is being carried into this year. Suffice to say, bullish reigns supreme and bears are giving up – even perma-bear Albert Edward sounded a little upbeat in the latest Global Strategy Weekly. And it’s not just the US that driving things – indices in Tokyo and Hong Kong are also trading at 26-year highs.
But there are words of caution. On the Shiller cyclically adjusted price to earnings ratio stocks have only been this expensive once in the past. Meanwhile, the Dow Jones has not been this overbought since 1904. In short earnings will need to deliver to keep the bandwagon rolling.
So to earnings expectations and we must look to FactSet’s data on where analysts’ views of EPS for the S&P 500. This shows analysts made the smallest downward revision to their estimates for any quarter since 2010. A familiar pattern usually emerges where analysts cut forecasts throughout the quarter ahead of reporting season, lowering the bar for companies to beat expectations and boost share prices. However this time the revisions are significantly less than usual.
Q4 bottom-up EPS estimate declined 0.3% during the quarter, versus an average over the last year of a 3.1% drop. Over the last five years, EPS estimates have been cut by 4.2% on average. During the last ten years, this cut to forecasts is usually 6%.
It’s worth noting that this does not in itself signal earnings will improve more than is currently expected by the market, only that analysts are retaining a more bullish stance than usual.
Sector performance varies of course and bottom-up EPS forecasts for Energy stocks has actually jumped 24.5% over the quarter as oil prices surged.
Complicating matters is the overhaul of the US corporate tax system. This will be the last quarter of earnings that offer a straight comparison with previous quarters. For the first time, on a company-by-company basis we will get a feel for how the corporate tax changes will affect earnings growth going forward.
There are two main areas to consider. First the cut in the corporate tax rate from 35% to 21%. Second is a one-off levy on offshore earnings which American Express and Goldman Sachs say will result in a one-off hit of $2.4bn and $5bn respectively.
Upcoming earnings highlights
Friday, 12 January
BlackRock (BLK) – Q4/2017, EPS estimate 5.949
JPMorgan Chase & Co (JPM) – Q4/2017, EPS estimate 1.695
Wells Fargo & Co (WFC) – Q4/2017, EPS estimate 1.025
Tuesday, 16 January
Citigroup (C) – Q4/2016, EPS estimate 1.226
UnitedHealth Group (UNH) – Q4/2017, EPS estimate 2.507
Wednesday, 17 January
Alcoa (AA) – Q4/2017, EPS estimate 1.254
Bank of America (BAC) – Q4/2017, EPS estimate 0.446
Goldman Sachs (GS) – Q4/2017, EPS estimate 4.994
US Bancorp (USB) – Q4/2017, EPS estimate 0.869
Thursday, 18 January
American Express (AXP) – Q4/2017, EPS estimate 1.543
Bank of New York Mellon (BK) – Q4/2017, EPS estimate 0.904
Morgan Stanley (MS) – Q4/2017, EPS estimate 0.771
Friday, 19 January
Schlumberger (SLB) – Q4/2017, EPS estimate 0.448
Monday, 22 January
Netflix (NFLX) – Q4/2017, EPS estimate 0.416
Tuesday, 23 January
Johnson & Johnson (JNJ) – Q4/2017, EPS estimate 1.719
Procter & Gamble (PG) – Q4/2017, EPS estimate 1.139
Travelers (TRV) – Q4/2017, EPS estimate 1.736
Verizon Communications (VZ) – Q4/2017, EPS estimate 0.884
Wednesday, 24 January
Ford Motor Co (F) – Q4/2017, EPS estimate 0.451
General Electric (GE) – Q4/2017, EPS estimate 0.304
United Technologies (UTX) – Q4/2017, EPS estimate 1.560
Thursday, 25 January
Caterpillar (CAT) – Q4/2017, EPS estimate 1.754
Intel Corp (INTC) – Q4/2017, EPS estimate 0.865
Friday, 26 January
3M Co (MMM) – Q4/2017, EPS estimate 2.021
Thursday, 1 February