Q4, 2018 Earnings Expectations Coming in ‘Through the Roof’

Fourth-quarter 2017 earnings are rolling in and, so far, money managers and analysts like what they’re seeing.

“We expect a solid fourth-quarter earnings season and believe a 14 to 16 percent year-over-year increase in S&P 500 earnings is achievable,” said LPL Financial’s Ryan Detrick, senior market strategist, and John Lynch, chief investment strategist, in a new research statement.

Economic surprises, strong manufacturing activity, and a weak U.S. dollar are a few of the primary reasons results may come in above expectations, they added.

“Our positive earnings outlook for 2018 is well supported by our forecast for accelerating global growth and the new tax law,” the pair said.

Through late January, S&P 500 Index earnings were tracking at a 12 percent year-over-year increase. A solid 79 percent of the 50 companies monitored by LPL had bested earnings estimates, and 87 percent topped revenue targets.

“Both are well above recent and long-term averages,” the LPL note concluded.

The rosy scenario for fourth-quarter earnings isn’t actually a surprise – it’s just an extension of a long-term, upward market trend.

“The S&P 500 has exceeded quarterly earnings expectations for 34 straight quarters and we see no reason why the fourth quarter of 2017 won't make it 35,” Detrick and Lynch stated.

All the Sectors

Although earnings growth may be driven mostly by technology and energy, growth is expected to be broad based, with a reasonable chance that all 11 sectors will report growth in earnings when all results are recorded, the analysts said.

Other Wall Street watchers agree with the sentiment from LPL, adding that their own projections for fourth-quarter earnings growth are firmly ensconced in the blockbuster category.

“Our Q4 projections for our opportunistic-themed fund are through the roof, mainly because of land acquisitions and value-add opportunities,” said Philip Michael, an investment fund manager at New York Equity Group. “In addition, cheap access to capital, both from domestic banks and leveraging European assets -- with negative interest rates -- makes it easier to deliver strong spreads.”

Even significant – and pricey – headwinds aren’t enough to derail earnings growth in Q4, and into 2018, other experts say.

“I am a bit surprised by the strength of earnings so far, given the one-time charges that companies have taken,” said Joel Salomon, a former hedge manager and prosperity coach at SaLourMor in New York City. “But it’s an easy way to also take a ‘kitchen-sink’ quarter to set up for 2018’s robust growth.”

A favorite sector continues to be financials, said Solomon, because of less regulation, more mergers and acquisitions, stronger post-tax-reform American companies compared to non-American companies, and higher interest rates.

Sector-wise, commercial insurers with price increases in the fourth quarter of 2017 for catastrophes, should outperform, Solomon said. Additionally, life insurers and regional banks that are more asset-sensitive, should excel, as well.

“Credit card companies are also poised to have huge performance in 2018, as they can buy back more company stock and their net interest margin should improve as rates move higher,” he added.

'Good Upcoming Results'

Overall, key indicators confirm the trend toward stronger earnings going forward.

“The U.S. Citi Economic Surprise Index, a measure of economic data relative to expectations, is near record highs,” Detrick and Lynch stated. “When economic activity surprises to the upside, as it has consistently done in recent months, companies tend to beat estimates.”

Global economic surprises are also strongly positive, supporting multinationals' earnings.

“This unexpected tailwind, combined with management teams' tendency to be conservative and the lack of negative macroeconomic surprises, points to good upcoming results,” said Detrick and Lynch.

It might be too early to pop any champagne corks, but strong Q4 earnings are a great sign. The trend should continue in the first quarter 2018, thanks to a stronger economy and the continuing afterglow of tax reform.

That scenario could really raise the roof for stocks during the rest of 2018.

“We expect a strong fourth quarter earnings season and a mid-teens increase in S&P 500 earnings,” Detrick and Lynch state. “Although we may see a pickup in volatility in the near term, we believe our earnings expectations for 2018 support further gains for stocks over the balance of this year.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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