GSBulletIn: How long can stronger earnings be ignored?

2 May 2018
How long can stronger earnings be ignored? At the end of March 2018, i.e. right before the U.S. earnings season kicked off, markets expected year-on-year earnings […]
 

How long can stronger earnings be ignored?

  • At the end of March 2018, i.e. right before the U.S. earnings season kicked off, markets expected year-on-year earnings to grow by 17%. Now – with the benefit of hindsight after more than half of S&P 500 companies have reported their results and after more than 80% of them managed to beat expectations – consensus sees yoy earnings growing by even 23%.
  • Although 80% “beats” would mark an all-time record, and 23% yoy earnings growth the best result since 2010 (if both will be confirmed at the end of the earnings season), investors cannot get excited and the S&P 500 index treads water and volatile splashes get rarer.
  • The bears caution, now already, over a slowdown of earnings growth in 2019 … as if that would come as a surprise. For obvious reasons (base effect) the tax cuts which stand for about half of this year’s earnings growth will no longer have an impact on next year’s earnings growth. However, they will still represent a tailwind for earnings and subsequently for equities, for a few more years.
  • Our conclusion: Stronger than expected earnings are good news, the lack of any euphoria is even better news as it leaves room to the upside, when greed will again take the lead over fear. That said, we don’t expect equities moving higher in a straight line. We just expect more ups than downs for the rest of the year. Interesting times ahead for tactical, opportunities-driven strategies, less so for the “buy-and-hold” community.
 

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