Fourth quarter earnings update
February 25, 2018
Earnings reporting season for the fourth quarter of 2017 is almost over with and the results have been good so far.
According to data from FactSet, with just over 80 percent of S&P companies having reported already, 75 percent have reported earnings above their estimates, and 78 percent have beaten their sales forecast. Earnings growth to date is at 15.2 percent, which will be the best quarter since the third quarter of 2011 if it holds up for the remainder of the reporting season.
The market's valuation is still fairly high even after the recent pullback we've witnessed. Currently, the forward PE or price to earnings ratio is at 17.1, which is still higher than both the five- and 10-year average. The five-year average is 16.0 and the 10-year average is 14.3.
The market topped out at record highs on Jan, 26, and has dropped somewhat since then. We did witness the largest point drop in Dow history, but in percent terms it wasn't even close to a record drop. The market has recovered about 66 percent of its recent fall already and is still highly valued in historical terms.
Energy has been the best performing sector with a year-over-year growth rate of 121 percent. Of course, that is compared to extremely low earnings one year ago. Materials has been the next best sector with an earnings growth rate of 42 percent, led by the Metals and Mining Industry. Information Technology is the third best sector with a 22 percent growth rate led by the Semiconductor Industry. The Financials sector came in fourth out of the 11 S&P sectors with a 15 percent rate of growth.
Looking ahead, double-digit earnings growth is expected to continue all of next year. The current forecast is for earnings growth of 17.9 percent and revenue growth of 6.6 percent in 2018. If the strong earnings continue that should be good for the stock market, as corporate earnings are the main driver of stock prices.
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It will be interesting to see how the market performs the rest of the year after the record setting run we had from the election through the end of January. Corrections, which are defined as drops of at least 10 percent, are normal during bull market cycles and usually occur about every 18 months. We'll have to monitor how the market reacts as we approach the old record high levels, will we breakout or pullback?
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.comor 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.