In 2017 the S&P 500 was on a roll. For the first time in its history it produced positive total returns every month. Not surprisingly that momentum was largely reflected in the earnings of its constituent companies.
With the vast majority of Q4 results in, over three-quarters of company Q4 earnings exceeded analysts’ expectations. The overall figure of 76% was above the 72% average for the past four quarters and well above the long-term average of 64%.
All but one of the 11 sectors in the index are expected to see an improvement in earnings in Q4 2017 relative to Q4 2016, with energy, materials and tech accounting for much of the growth between them. Real estate fared the worst and was the only sector to see a drop in earnings.
Oil companies on top
According to Thomson Reuters, the energy sector is expected to earn $11.6bn in Q4 2017 compared with $5.2bn in Q4 2016. While all six sub-industries in the sector are expected to see higher earnings than a year ago, oil and gas exploration and production and oil and gas equipment and services performed the best. These industries benefited from a higher oil price and comparison to weak figures from the previous year.
In the materials sector all four industries posted earnings growth. According to FactSet copper was one of the stars with earnings growth year-on-year of more than 100%. Copper was in short supply globally from the middle of 2017.
The tech sector was the third best for year-on-year earnings growth. Like energy and materials it is also one of the sectors with the highest international revenue exposures of all eleven sectors in the index.
Real estate was the one sector where earnings fell year on year, from $7.7bn in Q4 2016 to $7.4bn last year. While six of the eight sub-industries are expected to see earnings rise, two areas, office and healthcare real estate investment trusts (REITs), saw falls in earnings compared with Q4 2016, with rising interest rates impacting their returns.
Overall, fourth quarter earnings are expected to increase 14.8% from Q4 2016. If the energy sector is taken out of the equation that figure falls to 12.6%.
Companies also beat revenue predictions on a grand scale, with 76.9% of companies reporting Q4 2017 revenue above expectations. This is above the long-term average of 60% and well above the average over the past four quarters of 63%.
The average increase in revenue in Q4 was 8.2% - the highest growth since Q4 2011.
The best of times; the worst of times
Of course, the S&P 500’s constituent companies had varying fortunes in 2017. The shares that did best in 2017 were:
- NRG Energy up 132% (Utilities)
- Align Technology up 131% (Healthcare)
- Vertex Pharmaceuticals up 103% (Healthcare)
- Wynn Resorts up 95% (Consumer discretionary)
- Boeing up 89% (Industrials)
While those faring the worst were:
- Baker Hughes down 51% (Energy)
- Range Resources down 50% (Energy)
- Under Armour A shares down 50% (Consumer discretionary)
- Scana down 46% (Utilities)
- Envision Healthcare down 45% (Healthcare)
The Q1 2018 picture is mixed so far with 71 S&P 500 companies issuing negative EPS guidance and 57 positive.
FactSet’s senior earnings analyst John Butters said: “Coming into the Q1 earnings season, companies in the S&P 500 with higher global exposure are expected to benefit from the tailwinds of a weaker US dollar and higher global GDP growth.”
Analysts have, unusually, increased their estimates for Q1 2018 earnings. In part this is down to the decrease in the corporate tax rate. Other factors that may affect companies in the S&P 500 include the rising oil price and anticipated interest rate rises.
FactSet estimates earnings growth for Q1 2018 for the S&P 500 at 17%, with companies which generate more than 50% of sales outside the US predicted growth of 19.3%
If 17% is the final growth rate for the quarter, it will mark the highest earnings growth reported by the index since Q1 2011 when the figure was 19.5%. It will also mark the fourth time in the past five quarters that the index has reported double-digit earnings growth.
All 11 sectors are expected to report year-on-year growth in earnings, with seven sectors expected to report double-digit earnings growth, led by energy, materials, technology and financials.
FactSet predicts year-on-year revenue growth rate for Q1 2018 at 7.2%. All 11 sectors are expected to report year-on-year growth in revenues, with materials, energy and information technology expected to report double-digit growth.
For the whole of 2018, analysts are predicting earnings growth of 18.4% and revenue growth of 6.6%.