Earnings and Trade
Companies report their quarterly earnings all through the year on their own schedule. Because of that, the press, research folks, and portfolio managers generally consider “earnings season” to be between the reporting of Alcoa to kick things off and Walmart to finish. With that complete, (yes, I know I’m a few weeks late), here are some thoughts.
The earnings beat rate finished the first quarter (Q1) at 67.9%, meaning 67.9% of companies beat their estimates. The revenue beat rate was even better coming in at 71.6%.
Those numbers are good, make no mistake. Trace the horizontal orange line across to see how good these rates are historically. (Source for all charts below: Bespoke)
When you break it down by sectors, Industrials, Financials, and Technology had the strongest earnings beat rates. Technology, Industrials, and Real Estate had the strongest revenue beat rates. Additionally, every single S&P 500 sector reported double-digit earnings growth in Q1. (*Because of the Alcoa/Walmart earnings window, this is only 90% of companies that report.) Consumer Staples, which reported the lowest earnings growth rate of the 11 sectors, reported +11.8% growth.
On a side note, we have had an overweight to the Technology, Industrials and Financials sectors in our equity portfolio for quite some time now.
The spread between the percentage of companies raising guidance minus the percentage of companies lowering guidance ended up at +4.9. Not sure what that means or if it’s good? No problem…just look at the chart and the black horizontal line. (Hint: it’s good.)
To finish this all up, let’s review the reported and estimated earnings and revenue growth rates for the S&P 500. As you can see below, S&P 500 Q1 earnings were up +24% versus the same quarter in 2017 (year-over-year, or YoY). Again, because of the observed reporting window, it is +90% of reporting. That’s good and the estimated earnings growth for the remaining three quarters of the year (YoY) show near 20% growth expected as well.
Top-line revenue growth for S&P 500 stocks is not as impressive as earnings with Q1 reported revenue up +8% YoY (+90% reporting). The next two quarters see projected revenue growth between 7% and 8% as well and Q4 estimates are for +5.1%. We will see what happens, but that’s positive.
So why do people feel like they are not making money in their portfolios?
The benefits of the tax package seen in the earnings data above are being offset by trade war saber rattling. This is just going to have to play itself out.
This requires me to write about the President, which is a clearly polarizing topic – I’m being as objective here as I can (says the guy who has a Democrat yard sign in front of his house at this very moment – true story). Trump’s position is that our trade partners are gaining from our tariffs being less than their tariffs and they are benefiting from their subsidies being more than our subsidies. That’s a good deal…FOR THEM. Is it any surprise that they are resisting change? Every leader has a responsibility to act in the best interests of their citizens – the current teeth gnashing is nothing more than that.
I think the President is playing for the long-term and clearly has no reason to shy away from taking short-term punches. His position is that this will bring changes that are needed for the future. He ran on and continues to operate under his America First slogan.
Let this play out. Short-term, this will probably cause some continued volatility. But no one reading this is a short-term investor…right?
Companies are making money. That’s important. Always has been, always will be.
Keep looking forward,
Dave
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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