US Corporate earnings season kicks off
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
US companies report their profits quarterly and the corporate earnings season kicked off this week. Rising profits are expected to signal strong corporate wellbeing. In the long run it is generally accepted that company profits growth should trend alongside sales growth, which in turn tracks economic growth. Corporate profits claim a share of GDP and this share is already elevated.
One of the important elements of the earnings season is not just the level of profits but the extent to which they meet or beat forecasts. As illustrated by the chart below, earnings expectations have been set phenomenally high for the first quarter of 2018. Reasons include a supportive economic backdrop, which has gained momentum from global synchronised growth, loose monetary conditions and new fiscal policies such as tax cuts. These factors are helping to energise the US economy.
Actual data produced by FactSet in the chart below illustrate what has happened in prior quarters. Since Q2 2016, earnings growth rates have surpassed estimates by a healthy margin. For Q1 2018 forecast earnings expectations are at a whopping 17.3% and surpassing such a high rate will be no easy task. You will note from the chart that we do not yet know the actual earnings outcome because companies are only now releasing their profit numbers.
S&P 500 Estimated Earnings Growth v Actual Growth
Source: FactSet, April 2018
As we write this, 14% (72) of the businesses within the S&P 500 have already reported their earnings. Over 80% of the 72 companies have beaten expectations. Technology, financial and consumer good companies are all doing particularly well.
The standout company so far is Goldman Sachs. Sales increased by 25% year on year to $10.4bn – the company’s highest in three years. This exceeds the $8.7bn profit forecast.
The earnings report released by Goldmans is the first real tangible evidence of the impact from the recent tax reform enacted by Donald Trump. The bank’s effective tax rate for the first quarter dropped to 17.2% from 22% in 2017, adding more than $160 million to profits from tax savings.
The results reported have been better than expected with profits growth significantly outstripping sales growth. The rates of profits growth we are seeing is unsustainable as profit margins are already at peak levels. Analysts will be looking very closely at sales growth to get a better sense of corporate and economic performance.
We will provide a more complete picture on US earnings and sales once all companies have reported.