Market Beat: Fourth-quarter earnings update
February 25, 2019
Earnings reporting for the fourth quarter of 2018 is winding down, to date about 80 percent of S&P companies have already reported and the results have been good.
So far, the earnings growth rate for the S&P 500 has been 13.1 percent. If the growth rate stays that high it will be the fifth consecutive quarter of double digit earnings growth. Corporate earnings are expected to slow down in 2019. About 70 percent of reporting companies have reported better than expected earnings.
One interesting thing that we've been seeing in this reporting period is that the companies whose actual reported earnings are less than the mean estimate aren't falling in price as much as normal. So far the average price drop for companies who have disappointed has been minus -0.4 percent and the five-year average has been a decline of minus -2.6 percent for those companies whose earnings don't meet the expectations.
Market valuations have come down slightly in recent months. According to data from FactSet, the forward PE or price to earnings ratio is at 16.0 which is below the five year average of 16.4 but higher than the 10-year average of 14.6.
The strong 13.1 percent earnings growth rate has been led by the Energy sector with a growth rate of 97.5 percent. The Communications Services sector has the second best growth rate at 22.2 percent and the Industrials sector is third with a rate of 18.3 percent.
Oil & Gas Drilling has led the Energy sector, Diversified Telecommunications Services has led the Communications Services sector and Construction & Engineering is number one in the Industrials sector.
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The revenue growth rate is at 7.0 percent and is led by Communications Services, Real Estate and Energy. Revenue growth has been led by Alphabet, formerly Google, in the Communications Services sector and CBRE Group in the Real Estate sector.
Analysts are forecasting the double digit earnings growth rate that we've seen over the last several quarters to slow down this year. Currently for 2019 the projected earnings growth rate is at 4.8 percent and the revenue growth rate is forecast to come in at 4.9 percent.
Several more companies will be reporting over the next couple of weeks as the earnings reporting season comes to a close. Hopefully they will meet expectations for the most part and we will see the double digit earnings growth continue this quarter. Corporate earnings are the main driver of stock prices.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 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.
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