US equities have led the recent correction in global equities. We have been swinging around on Twitter headlines, with index futures traders deciding the short-term direction of markets. Pretty much everything has been moving up and down in tandem, led by gyrations in index futures markets.
We have been devoid of fundamental company news, due to the blackout period on Wall St, and simultaneously we have been without on-market buyback support, due to the same company blackout period. That changes at the end of this week as we get the first taste of US Q1 earnings, which will be strong, and buybacks will also be allowed to recommence.
Back to fundamentals
I believe the market focus will switch from macro risk events, to bottom-up stock fundamentals, and with the S&P500 now back at a reasonable valuation, there is a good chance strong US company earnings, plus buybacks recommencing, will put a floor under Wall St. If I am right, and we head back to a fundamental earnings focus, then I am of the view that this correction is over. I need US earnings to beat expectations, and I feel they will.
With the help of Morgan Stanley, I thought it would be useful to preview this all-important US Q1 earnings season. Even if you only invest in Australia, this is important, as it will decide the direction of Wall St, and the ASX in sympathy, as we have seen this year. US equities are the dog, and every other equity index, the tail.
We have used a lot of charts to make this easy to understand, remembering it is the critical swing factor of the next month and next quarter.
US 1Q18 EARNINGS PREVIEW & CALENDAR
First quarter 2018 18 is expected to see 16.5% YoY EPS growth, which is the highest YoY EPS growth since 3Q11. Elevated earnings growth prospects reflect tax reform benefits, as well as healthy organic growth. Given that companies generally do tend to beat more often than miss, and year over year growth does jump higher during earnings seasons historically, the S&P 500 has a chance of seeing even higher than 16.5% YoY earnings growth.
Additionally, MS Research has noted that there can be a further boost to earnings from certain accounting rule changes, which allowed certain firms to move revenue recognition forward, while moving expenses backward, thus boosting earnings this quarter.
Full year 2018 EPS growth is currently forecast to be 18.4% for the S&P 500 (2018e EPS $158.61). 2018 Y/Y EPS growth jumped meaningfully high in January, when post tax-reform benefits were baked into analysts’ estimates.
Energy is projected to see 67% Y/Y EPS growth in 1Q18, the highest among all GICS sectors. Tech and Financials follow up with 21% YoY rate, then Materials at 20%. Consumer sectors are projecting the lowest YoY EPS growth: Discretionary 6% and Staples 5%. No sector is projecting an earnings decline in 1Q18.
Revenue Growth: 1Q18 is projected to see 6.4% YoY revenue growth, which is lower than last quarter’s growth, but still on the elevated side versus the recent few years. Energy and Tech are expected to see the highest YoY revenue growth, at 13.5% and 13.0% respectively. Meanwhile, various defensive sectors are expected to see the lowest revenue growth: Staples 2.2%, Utilities 1.9%, and Telcos 1.4%.
1Q18 Earnings Calendar
4.3% of the S&P 500 market cap reports earnings this week, and notably, 28% of Financials will be releasing numbers, including JP Morgan, Wells Fargo, and Citi. By the end of the month of April, 63% of the S&P 500 will have reported earnings. The biggest week for 1Q18 earnings season is the week of April 23rd, when 41.9% of the S&P market cap is projected to report.
Names reporting this week include:
All in all, I am of the view Wall St will pass the Q1 earnings test and the bull market will recommence in global equities. We all need to remember bull markets never end when economies and earnings are still growing strongly. They end on “euphoria”, when we see significant P/E expansion and reckless buying of anything. I don’t think we are at that point and I remain of the view we are in a structural bull market for equities.
Markets have been devoid of fundamental information for months. At the same time volatility picked up, exacerbating moves in markets that are devoid of stock-specific information.
That all changes at the end of this week and I believe 16.5% YoY earnings growth in Q1 from US companies should be the fundamental catalyst to end this correction and see money and short-covering come in from the sidelines.
As I wrote last week, it’s always darkest before the dawn, and I think it’s prudent to take advantage of the lower prices you see in global equities ahead of the pending recovery.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.