Market Beat: Third quarter earnings reports look good
November 29, 2017
Earnings reporting season for the third quarter of 2017 is just about over as more than 90 percent of S&P companies have already announced their third quarter results. Corporate earnings are the primary driver of stock prices and the numbers this quarter have been pretty good overall.
According to data from FactSet, the earnings growth rate for S&P companies has been 6.1 percent. Seven of the eleven different sectors have reported positive earnings growth for the quarter. The revenue growth rate came in at 5.8 percent.
The Energy Sector has reported the largest earnings growth at 135 percent. That sounds like a huge increase, but it's mainly due to how poor the Energy Sector earnings were in the third quarter of 2016. The Information Technology Sector had the next best earnings growth rate at 19.5 percent. The Semiconductor Industry was the leading industry in the Information Technology Sector.
The Materials Sector was the third best performing sector with a gain of 10.7 percent. The growth in the Materials Sector was led by the Metals and Mining Industry.
The Energy Sector has reported the largest earnings growth at 135 percent. That sounds like a huge increase, but it’s mainly due to how poor the Energy Sector earnings were in the third quarter of 2016.
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Financials were the worst performing sector with an earnings drop of 8.3 percent. The Insurance Industry accounted for most of that decline. Earnings for the Insurance Industry dropped 63 percent and if those earnings were excluded from the sector, Financials would have recorded an earnings growth rate of 6.0 percent instead of the 8.3 percent drop that they recorded.
One interesting theme this quarter was that S&P companies with more global exposure reported higher earnings growth rates. Economic growth has been pretty strong in Europe and the United States dollar has weakened a little bit recently relative to the Euro.
Stock market valuations are fairly high by historical standards right now. The forward P/E ratio for the S&P 500 is 18.0, which is above both the five- and 10-year average. PE stands for price to earnings ratio and is calculated by dividing the share price by the earnings per share.
The stock market is a forward-looking mechanism and it appears that some form of tax reform is currently priced into the market. Many of the companies commented about tax reform during their conference calls. Some were anticipating a positive effect and others expressed some concern about what details the final version of the bill would contain.
Looking ahead earnings growth is expected to hit double-digit levels for the fourth quarter and the first three quarters of 2018.
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.