Everything is still awesome - The first earnings season update of 2018:
Bottom Line: The stock market's record performance since the 2016 election hasn't let up at all through the first half of January. In fact, the S&P 500 has put up its best start to a year in fifteen years. Yes, the start of this year has been even better than last year... In this week's edition of how low can stocks go? I've broken out the risk and demonstrated why stocks have continued to rise. Simply, it's about improved performance. This story tracks the progress of companies to deliver on earnings expectations so we can determine if the run has been justified and to track fundamental improvement in corporate America and our economy generally.
Last week was the first week of earnings season, so we're able to get our first vision of what the 4th quarter looked like along with guidance on our current economy from companies. Here's the scorecard...
Through Friday 5% of companies had reported their results for the fourth quarter. Coming into the 4th quarter the average economist expected about 2.5% economic growth. By the end of 2017 the New York Federal Reserve upped the estimate for growth to just under 4%! That tells you about how good the economy appeared to be. While we wait for the first look at fourth quarter growth on January 26th - we know where companies stand as soon as they report.
The expectations are high for America's companies. The average estimate for earnings growth is 10.8% year over year and all eleven sectors of the US economy are projected to have grown. So, are we getting the follow through?
5 percent of companies have reported
69 percent have reported positive earnings surprises and 85 percent have topped sales targets
Earnings growth has been 10.2 percent
Here's the story so far. Financials haven't performed quite as well as expected but pretty much everything else has been terrific so far. Having nearly 9 in 10 companies that have reported in the early going exceed sales targets gives you and incredibly impressive view of the strength of the economy through year end. You only see beats like that when the economy is gaining strength and momentum progressively through a quarter. It's safe to say I'm excited to see how the economy performed to end 2017.
If the economy was growing anywhere near a 4% rate at year end - before the influence of tax reform kicking in, there's a heck of a lot of room for optimism. I continue to hear a lot of skepticism from people about weather this good run can continue. Whether we're talking about stocks or the economy generally it's important to remember that we haven't had a strong economy in 12-13 years. It's natural to have become conditioned to mediocrity when it's been so long but this economy is different and has been showing its strength for 9+ months. Current growth estimates are now at 3.2% for the first quarter economy. How different is that? The average first quarter growth rate of the past decade has been 1%. It's only been 1.9% on average over the past five years.
Plus remember that the average American will benefit from tax reform by 4%, or an extra $1,980 this year. Add in raises and the average net take home pay is 7%+ higher. With consumer spending adding up to be about 70% of the US economy - clearly there's lots of room for optimism still...