Spring is in the Air

April 16, 2017

Spring is in the air in Georgia. The azaleas were on brilliant display last weekend at the Masters tournament in Augusta. Everything is coated with a light dusting of pollen. And we are scrambling to collect and distribute all the last minute tax documents. It happens this time every year like clockwork. And just as the tax season draws to a close, earnings season is just beginning.

Earnings season refers to the several weeks long period after the end of each quarter when publicly traded companies report their financial results. Analysts follow these events closely, looking for insight on the past performance and future prospects of the companies they follow. The stock price of a company may fluctuate significantly around its earnings announcement. If a company announces better earnings or revenue results than the market is expecting, the stock price may jump up. If a company misses earnings or revenue projections, the stock price may decline sharply. Analysts will also be listening for forward guidance: is the company’s outlook better, worse, or about the same as it was at the last earnings release? All these factors make earnings season an exciting time for investors.

For the past few years earnings growth has not been very impressive. In fact, last quarter the S&P 500 earned slightly less than it did in Q3 of 2014. Over the past twelve quarters or so earnings growth has been relatively flat while the market has continued to advance in price. But Spring is in the air for earnings too, and it looks like earnings growth may finally be accelerating.

Analysts are currently projecting 17% earnings growth, and 7.4% revenue growth, for the S&P 500 in aggregate for Q1 2018. All eleven sectors are expected to report positive earnings growth for the quarter. 26 companies have reported so far and we get another 60 reports this week. If companies deliver on these expectations, and we achieve 17% growth or better, it will be the strongest quarter for earnings growth since 2011.

How the market responds is anyone’s guess. Will we get April showers or May flowers? Only time will tell. When analysts have high expectations, it raises the bar for reporting companies and it can increase the likelihood of disappointments. If companies beat the raised expectations (and early indications are very positive) it can boost investor confidence and provide fuel for a continuing advance.

Markets are always forward looking so we will be listening with great interest to hear what management teams are emphasizing in the Spring earnings season.

Mike Masters