Market Beat: Second quarter earnings update
August 21, 2018
Earnings reporting season for the second quarter of 2018 is just about over. More than 90 percent of S&P companies have reported now. The reports have been coming in very strong, slightly above the expectations.
To date the earnings growth rate for the S&P year over year is at 24.6 percent, which is higher than expected. If the earnings growth rate stays this high through the remainder of the reporting season it will be the highest growth rate since the third quarter of 2010 when it hit 34.1 percent.
According to data from FactSet companies with more global exposure reported both higher earnings and sales growth than companies with less global exposure, led by the Information Technology, Energy and Materials sectors.
Almost 80 percent of the reporting companies have beaten their earnings estimates and the stocks of those companies increased in price by an average of 1.2 percent in the days following their announcement.
All of the S&P sectors are reporting positive earnings growth for the quarter and ten of the eleven sectors have reported double digit earnings growth. The earnings growth has been led by the Energy, Materials and Information Technology sectors respectively.
Revenue growth has also been strong. The year over year revenue growth rate is at 9.9 percent, which is the best it's been since the third quarter of 2011. Ten sectors have reported year over year revenue growth. Four sectors; Materials, Energy, Information Technology and Real Estate have reported double digit revenue growth for the quarter.
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Looking ahead the earnings growth rate is expected to remain near 20 percent for the rest of the year, but is expected to drop down to about 8 percent in the first two quarters of 2019. The market is fully valued here, the forward PE or price to earnings ratio is at 16.6 which is above both the five- and 10-year average. The five year average is 16.2 and the 10-year average is lower at 14.4.
One interesting development that we'll have to watch is that President Trump has asked securities regulators to determine whether U.S. companies could report on a biannual basis instead of a quarterly basis in the future. Companies in the United Kingdom and the European Union report twice a year instead of quarterly.
Some CEOS think that biannual reporting will help them maintain a longer term viewpoint. The SEC will look into biannual reporting and make their determination at a future date.
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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