May 02, 2017 | Post by: Roman Chuyan, CFA Comments Off on Earnings Growth Drives Market Upside

Earnings Growth Drives Market Upside

Double-digit earnings growth is fastest since 2011

The Q1-2017 earnings reporting season is well underway. While equity market valuation remains high, profit growth momentum is gathering pace. Blended Q1 earnings growth (actual and estimated) currently stands at 12.5% according to Factset. This is the highest year-over-year earnings growth for the index since Q3 2011 when growth peaked at 16.3% (see chart). In aggregate, actual earnings exceed earlier consensus estimate of 9% by 3.5%. Historically, companies beat estimates by an average of 3-4%, but there’s still upside remaining to Q1 growth as the remaining companies report.

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Growth is driven largely by the Financial sector (18.9% growth), Materials (16.8%) and Technology (15.8%). Banking giants reported solid results due primarily to increased trading revenue, the Materials sector benefitted from stronger commodity prices, and technology companies reported strong results as well. The Telecoms is the only sector reporting a decline in earnings at -4.8%, with Verizon the largest contributor to the decline.

Earnigns growth by sector Q1-2017 - tactical investment management

Analysts are breaking away from the historical pattern of lowering their full-year estimate despite better-than-expected first-quarter earnings. In the past two years, the full-year index EPS estimate trailed to 118 after spiking to 124 in each 2015 and 2016. This year, the full-year estimate is currently around 129, unchanged throughout the Q1 earnings season.

Revenue growth rate is 7.5% in Q1, also the highest since 2011. 68% of companies have beat revenue expectations, better than historical average. Top-line growth has been difficult to achieve in previous years, so the reversal of that trend is very positive. Inflation at around 2% helps drive nominal sales growth, even with the same real growth. Additionally, President Trump’s administration pledged tax cuts and infrastructure spending later this year – if enacted, they should provide another boost to growth.


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Disclosures: Roman Chuyan is the president and general partner of Model Capital Management LLC, a Registered Investment Adviser. This article is for informational purposes only. There are risks involved in investing, including loss of principal. Roman Chuyan makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by him or Model Capital Management LLC. There is no guarantee that the goals of the strategies discussed in this article will be met. Information or opinions expressed may change without notice, and should not be considered recommendations to buy or sell any security. Asset allocation, tactical asset allocation, TAA, tactical investing, tactical management, ETF, tactical investment management, Financial planning systems for advisors, Financial planning tools for advisors, Financial planning tool for advisors. Envestnet, TD Ameritrade, Adhesion, Best TAMP, SEI Advisor Network, Schwab intelligent portfolios. Betterment institutional, Schwab PortfolioServices, Dynamic wealth advisors. Investor onboarding, Financial planning platforms, Client onboarding for wealth firms, investment management for WM. Investment management for advisors, Schwab performance technologies, SEI Advisor, Ameritrade Adhesion, Best TAMPs. Investment management platform, SEI Asset Management, Schwab Portfolio Services, Investment management platforms. Schwab Portfolio Center, AssetMark, Financial planning system for advisors, Orion Advisor, SEI Practice Management, client onboarding for WM. Financial planning software for advisors, Robo plus, Financial planning platform. Turnkey asset management platform, client onboarding wealth management, SEI Advisor Center, Orion Advisor Solutions, Schwab PortfolioCenter. Robo advisors plus, SchwabPT, Adhesion Wealth, investment management for advisor. Client onboarding for wealth, Turnkey asset management platforms, investment management for advisory, Schwab intelligent portfolio.

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