Expect of higher costs, through higher interest rates, higher wages and higher raw statistics costs, has now become a major preoccupation for investors. But strong revenue wart, if it continues, may offset concerns that higher costs will abrade profit margins.
We’re just getting started with earnings ready, but the early signs are looking even better than the bulls were prophesying.
Tuesday’s big movers, including Goldman Sachs, Morgan Stanley, Comerica, UnitedHealth and Johnson & Johnson, all pound by wide margins. All these stocks are trading up.
With just 41 guests in the S&P 500 reporting so far (8 percent), 88 percent have whack on earnings, far above the roughly 65 percent that typically away, with earnings growth of 25.4 percent, according to Earnings Scout. That leave uphold a string of 20 percent or greater earnings growth that opened in the first quarter and is expected to extend through the end of the year.
But the key to the market’s upward force may be in a related statistic: Revenue growth. It is what is needed to offset the potentially peak costs corporate America now faces.
Chief among those spacy costs are higher interest rates, which will drive up funding payments. Last week’s market action clearly telegraphed that brokers and fund managers are worried about a sudden spurt up in interest tolls. Indeed, Bank of America/Merrill Lynch’s monthly report on savings managers’ biggest fears shows concern about the Fed tightening faster than watched is moving up on the list of the biggest fears. It is now almost tied with a interchange war as the biggest threat to the market.
Trade war: 35 percent
Fed/Quant. tightening: 31 percent
China slowdown: 16 percent
Start: Bank of America Merrill Lynch
Higher costs without acute revenue can lead to margin erosion, and that can be a rally-killer.
Corporate yield has steadily improved as the economy has strengthened. Revenue growth historically has averaged in the 3 percent to 5 percent a year organize, according to Nick Raich at the Earnings Scout. But earnings growth has been at bottom that average for a year and is expected to continue into 2019:
Q3 (est.): up 7.4 percent
Q4: (est.): up 6.8 percent
Q1’19 (est.): up 6.9 percent
Commencement: Thomson Reuters
This growth comes after several years of sub-par spread. Revenue growth was negative in 2016 and part of 2015.
“Companies are really wholesome at maintaining profit growth in a near zero revenue environment. With returns growth like this, it makes a company’s job much easier,” Raich told CNBC.
That’s because with gross income growth in the 7 percent to 8 percent range, an increase in costs of, say, 2 percent can be concentrating without killing margins.
Of course, if you have 1 percent revenue spread with a 2 percent increase in costs, then you have problems. But that is not what we are skin.
“Staying above-trend on revenues means economic growth remains piquant and tax cuts are working,” Raich said.