So far, the prognosis for the stream of earnings coming online beginning in just over a week is strong but some suggest watching for signs of jaundice.
Corporate earnings are expected to benefit from tax cuts windfall. Bloomberg estimated that the S&P 500 Index will “have risen 17% in the first quarter, the largest jump in profits since the first quarter of 2011.”
But suspicions reign. While those profits gained on the back of tax cuts sure look alluring, Bloomberg argues, until all companies have reported that picture looks decidedly fuzzy for investors who are keen to know should they stay or should they go.
Jitteriness aside, analysts projected companies in the S&P 500 to earn $36.54 a share up from $34.50 a share in mid-December according to the news service. However, if the tax gain is excluded then non-tax related earnings growth it calculates is 11% and not 17% in the first quarter. Growth is still expected to be strong in 2018 with figures of around 20%. However, the tax boost' life span is only up to 2018. Average earnings gain for companies is expected to drop to 11%.
How will corporate earnings shape up over the next couple of quarters? Well, concerns about future quarterly earnings are somewhat diminished against the global economic story. Recent volatility not withstanding, the conditions for first quarter earnings and therefore stocks are bullish for very good reasons. To set the scene, global economic growth remains robust. The Trump trade tariffs had a slight draining effect on fourth quarter of 2017 but Q1 data indicates growth to expand 3.5%.
The global economy expanded 3.4% annually in Q4 just below the 3.5% rise estimated in February says economists. Continued growth is "propelled by largely accommodative monetary policies, tight labour markets and robust global trade...the global economy is set to expand to 3.5% in Q1."
The US, UK and Europe also continue to go from strength to strength. The US growth is a result of two stimulus measures tax cuts and higher spending caps by the government. US GDP was revised upwards to 2.9% annual rate in the fourth quarter last year according to the Commerce Department. This was higher than economists' expected 2.5% growth.
However, economists at Macroeconomic Advisers are projecting lower growth for the first quarter of 2018 of 1.8%. However, experts don't expect let up and that the economic engine for 2018 will continue to chug along.
Trump tarriffs and Brexit bump
Two factors that may have a deleterious impact on the economy and thereby corporate earnings are recently imposed tariffs and the now one year countdown to Brexit. The influence of the White House's trade measures could be a set back as Ricard Torne Codina, head of economic research at FocusEconomics writes in a research note: "Protectionist policies bode poorly for the U.S. outlook, risking a global trade war and obscuring an otherwise very healthy economic panorama."
The trade tariffs has a rippling effect as Europe, which is expecting a continuation of buoyant growth moderating slightly for first quarter of 2017. HFocusEconomics analysts see the drivers of strong growth of tight labour markets, high sentiment and accommodative monetary policy continuing to support activity, while a strong euro could dent export growth. The Eurozone economy is projected up to 2.4% in 2018.
In the UK, Brexit uncertaintly could derail moderate pick up in the economy. Growth projection is forecast for 1.5% in 2018. Torne Codina expects the economy "will likely lose momentum as private consumption growth slows and fixed investment is depressed by Brexit uncertainty. However, loose monetary policy and robust export growth thanks to the weaker pound should cushion the slowdown."
Ride the wave
Corporate earnings are certainly expected to ride the strength of the economic wave and the underlying trend remains positive.
But indicators are gathering that the bounty beyond 2018 is unlikely. Bank of America Merrill Lynch says ,ore companies are providing negative guidance is increasing and its earnings revision ration which compares estimates that rose against those that fell dropped in March for the first time in four months.
Investors may be reassured by the strong economic outlook for stocks, however they should watch with caution gathering storm clouds for 2019.