Tahoe-Truckee Market Beat: Fourth quarter earnings update
January 31, 2017
Earnings reporting season in getting into full swing, and the results have been pretty good so far. Traditionally, Alcoa Aluminum is considered to be the first company to report, but in actuality, several major companies report their earnings before Alcoa does.
With just over one third of S&P companies having reported already, the results have been better than the expectation. According to data from FactSet, about two thirds of the reporting companies have beaten their earnings estimate and about a half have exceeded the sales forecast.
The current forecast for earnings growth for the S&P 500 is 4.2%. If we do in fact see earnings growth for the last quarter of 2016, it will be the first time, and we've had consecutive quarterly earnings growth since the fourth quarter of 2014 and the first quarter of 2015.
Earnings had been declining in the last year or so. Right now the forward price to earnings ratio for the market is 17.2, which is above both the five and ten year averages.
Once again, the Energy sector has had the greatest earnings decline of all the sectors. The reported year over year drop in earnings for Energy is over 80% so far, and a few major companies still have to report their fourth quarter results.
Year over year earnings declines of more than 50% are pretty rare events. Since 2008, it has only happened four times. One of them was a drop of 60% for the Energy sector in 2015. The record for the largest drop was set by the Financials sector in 2008, when earnings fell by 112%.
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Most analysts believe that earnings growth will return to the Energy sector in 2017. That should be due to a couple of factors, including a higher oil price, which is forecast to climb by about 27%. The projected growth rate for the Energy sector this year is a remarkable 496%.
The Utilities sector is reporting the highest earnings growth rate at 19.5%. Financials are the next highest at 18.8%. The earnings growth for the Financials sector has been led by AIG, Goldman Sachs, JP Morgan Chase and Bank of America.
The fourth quarter of 2016 is shaping up to be fairly strong. Hopefully, with about two thirds of the S&P 500 companies yet to report, the trend toward earnings growth for last quarter will continue.
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.