Early Returns from Q4 Earnings Season

Q4 Earnings Season has kicked off and enough companies have now reported that we can begin to make some observations, and assess how good this season is!

In my preview, I observed that the market and the analysts continue to expect great results in 2018, and this earnings season would be critical in setting the tone for the whole year. The good news is that results are very encouraging so far – and the market’s reactions to Earnings Surprise has also looked good. Note: I use data from Factset’s Earnings Insight  for this report.

So let’s roll the videotape:

> As of Dec. 31, the quarter’s earnings for the S&P 500 was 11%. This is now gone up to 12% based on the earnings released thus far, and some upside estimate changes.

> This is going to be a messy quarter from an accounting standpoint. On the one hand, in Q4 the recent  tax reform will cause firms to take significant  charges to repatriate foreign held cash. With GAAP accounting, this will show up as an expense. When company’s report operating earnings, however, this will show us as a non-recurring item, and will not be included. Factset uses operating earnings and estimates.  On the other hand, companies that have included future tax liabilities will all of sudden get a windfall as their tax liability has decreased with the rates.

> 76% of companies that have reported thus far have reported positive surprises. The market has rewarded these companies with a good price impact: 1.4%, and surprisingly, the companies that have reported negative earnings surprise have not been hammered. This is a distinctly different pattern from recent quarters.

> Energy continues to put up gaudy numbers with year over year earnings growth at 139.1%! Other strong growth sectors are the Materials (29.9%) and Information Technology (16.1%)

> While all sectors look like they will turn in positive earnings growth, Telecom(.5%) and Consumer Discretionary (1.5%) are the two notably slow sectors. Telecom has been in Earnings purgatory for a long time now. Given that all you see all day is people checking their mobile phones, they clearly are not monetizing this use!

In summary, this is a textbook perfect start for Q4 Earnings Season. These robust earnings numbers help justify the strong valuations in the market. Investors should sleep a little better now that these early number confirm their high expectations. Next week is a big week: 125 of the 500 companies in the S&P 500 will report.

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