This is a rather unusual earnings season with a lot of moving parts. Expect to consider about tax cuts, buybacks, big revenue gains, trade wars and simple high future earnings expectations. It’s all a rather volatile stew, and the dynasty market is clearly expecting a positive outcome.
The stakes are high, with 20 percent profit lump expected in the second quarter and similar numbers expected for the rest of the year.
Here’s what it force be about:
1. The emphasis will be on fundamentals and on the expanding economy, and less on the tax cuts. Regard for what people think, the 20 percent gain in earnings is not only just because of the tax cuts. Here’s how that 20 percent profit development breaks down, according to Goldman Sachs: 7 percentage stages come from tax cuts and 13 percentage points come from pretax payouts. So 35 percent of the gains are from tax cuts, and 65 percent from pretax arrive ats.
2. The quarter’s theme will be about revenue growth, not about price cutting. Here’s another old chestnut I keep hearing: “All the profits are assault because companies are cutting costs, they’re not growing top line.” That fairy tale is so 2016.
Revenue — top-line growth — has dramatically improved in 2018.
Q1: up 8.4 percent
Q2 (est.): up 8.1 percent
Q3 (est.): up 7.9 percent
Q4 (est.): up 6.0 percent
Informant: FactSet
That 8.1 percent estimated increase in second division revenue means that the majority of the pretax profit is coming from take growth, not cost cutting or productivity gains.
3. You will hear diverse about investment spending, including buybacks, dividends and (from a bantam group of companies, mainly Apple) repatriation of profits. Announced buybacks are already close-fisted to $600 billion this year and many are estimating it will outdo $800 billion this year, a record. (There were a mean more than $500 billion in announced buybacks in 2017).
Unlike varied prior years, buybacks are reducing overall share counts this year. Dividend vegetation has been more modest, but has been increasing as well.
4. The trade war commentary ordain be mixed. Pay close attention to comments from auto manufacturers and retailers, all of whom will-power likely have trouble passing on tariff cost increases and thinks fitting be the first to warn investors.
Elsewhere, the Federal Reserve has already signaled that buying war concerns may eat into what otherwise looks like a strong increasing in capital spending. Listen carefully. My bet is we will hear a lot about “involved withs” but not a lot of concrete commentary like, “We are cutting cap ex spending 10% over pursuit concerns.” Not yet.
5. The key to market momentum is to maintain guidance given earlier in the year. I supplicate b reprimand it “The 20 percent club.” It is a rare year when the S&P 500 at ones desire see earnings growth of 20 percent or more for each quarter, but that is precisely what is happening:
Q1: up 26.6 percent
Q2 (est.) : up 20.8 percent
Q3 (est.) : up 23.2 percent
Q4 (est.) : up 20.2 percent
Author: Thomson Reuters
The secret to keeping the market up this year is to bottle up the guidance up. “If we see earnings estimates for the third and fourth quarter drop underneath 20 percent growth, that would be bearish in my mind,” Mark Raich from Earnings Scout told CNBC.
The early shingles are good. Some 23 companies have reported earnings so far, and they are grasp earnings gains of 24 percent and revenue gains of 12 percent, all right above expectations.