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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>
Stocks have been in a wait-and-see mode lately, looking ahead to greater clarity on the incoming administration’s policy priorities. After all, the market’s post-election optimism reflected expectations of friendlier fiscal and regulatory policies that should start taking concreate shape in the coming days.
The consensus view justifiably sees this emerging policy backdrop as favorable to earnings growth, though we haven’t seen any associated impact on earnings estimates at this stage. That said, a big part of the earnings outperformance from a number of the major banks in recent days can be chalked up to the post-election uptrend in interest rates and gains in risk appetites. Q4 earnings results from most of the major banks and brokers are largely in-line with expectations and consistent with the improving trend of the last few quarters. But they all show a notable improvement in their trading revenues, the credit for which has to go to the post-election macro backdrop.
This has been the recurring theme with all the major banks, except for Wells Fargo (WFC - Free Report) which doesn’t have a much of a trading business. Even Morgan Stanley (MS - Free Report) , which has been deliberately lowering its exposure to fixed income trading over the last few years, reported strong momentum in its trading revenues.
The strong post-election performance of bank stocks wasn’t in anticipation of a surge in trading revenues, but rather a function reduced regulatory burden, tax law changes and an improved outlook for the domestic economy. All of those things are still to come, though higher interest rates should help net interest margins in the current period even if those policy changes take longer to materialize. Please note that we discuss the reported and still-to-come bank results in more detail in the body of the report.
Q4 Earnings Scorecard
We now have Q4 results from 41 S&P 500 members that combined account for 12.5% of the index’s total market capitalization. Total earnings for these 41 index members are up +11.3% from the same period last year on +3.9% higher revenues, with 70.7% beating EPS estimates and 46.3% coming ahead of top-line expectations.
The side-by-side charts below compare the growth rates and beat ratios for the 41 index members with what we saw from the same companies in other recent periods.
Here are the key takeaways from the above comparison charts
First, the earnings growth for this group of 41 index members is notably above other recent periods. A big reason for that is the strong growth from the Finance sector, whose results dominate the picture at this stage. Excluding the Finance sector, the Q4 earnings growth pace drops to +5.8% from +11.3%.
Second, revenue growth is about in-line with historical periods.
Third, positive surprises for this group of 41 S&P 500 members are tracking below historical periods, both for earnings as well as revenues. It will be interesting if this trend persists through the rest of this earnings season, likely indicating that estimates didn’t fall enough in the run up to the start of this earnings season.
Q4 Expectations As a Whole
For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +4.7% from the same period last year on +3.7% higher revenues. The Q4 growth pace has been steadily improving in recent days as companies, particularly banks, have been coming out with better than expected year-over-year growth.
This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.
The chart below shows the Q3 earnings growth contrasted with declines in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.
As you can see, the +4.7% earnings growth in Q4 is followed by +9.5% in 2017 Q1 and +9.4% in the following quarter. It is reasonable to expect estimates for 2017 Q1 to come down as companies report Q4 results and share their business outlook with us. But given the relatively low magnitude of negative revisions that we experienced for Q4, coupled with the aforementioned positive expectations from the incoming administration, 2017 Q1 estimates may not fall by that much either.
Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.
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Bank Earnings & the Trump Effect
Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>
Stocks have been in a wait-and-see mode lately, looking ahead to greater clarity on the incoming administration’s policy priorities. After all, the market’s post-election optimism reflected expectations of friendlier fiscal and regulatory policies that should start taking concreate shape in the coming days.
The consensus view justifiably sees this emerging policy backdrop as favorable to earnings growth, though we haven’t seen any associated impact on earnings estimates at this stage. That said, a big part of the earnings outperformance from a number of the major banks in recent days can be chalked up to the post-election uptrend in interest rates and gains in risk appetites. Q4 earnings results from most of the major banks and brokers are largely in-line with expectations and consistent with the improving trend of the last few quarters. But they all show a notable improvement in their trading revenues, the credit for which has to go to the post-election macro backdrop.
This has been the recurring theme with all the major banks, except for Wells Fargo (WFC - Free Report) which doesn’t have a much of a trading business. Even Morgan Stanley (MS - Free Report) , which has been deliberately lowering its exposure to fixed income trading over the last few years, reported strong momentum in its trading revenues.
The strong post-election performance of bank stocks wasn’t in anticipation of a surge in trading revenues, but rather a function reduced regulatory burden, tax law changes and an improved outlook for the domestic economy. All of those things are still to come, though higher interest rates should help net interest margins in the current period even if those policy changes take longer to materialize. Please note that we discuss the reported and still-to-come bank results in more detail in the body of the report.
Q4 Earnings Scorecard
We now have Q4 results from 41 S&P 500 members that combined account for 12.5% of the index’s total market capitalization. Total earnings for these 41 index members are up +11.3% from the same period last year on +3.9% higher revenues, with 70.7% beating EPS estimates and 46.3% coming ahead of top-line expectations.
The side-by-side charts below compare the growth rates and beat ratios for the 41 index members with what we saw from the same companies in other recent periods.
Here are the key takeaways from the above comparison charts
First, the earnings growth for this group of 41 index members is notably above other recent periods. A big reason for that is the strong growth from the Finance sector, whose results dominate the picture at this stage. Excluding the Finance sector, the Q4 earnings growth pace drops to +5.8% from +11.3%.
Second, revenue growth is about in-line with historical periods.
Third, positive surprises for this group of 41 S&P 500 members are tracking below historical periods, both for earnings as well as revenues. It will be interesting if this trend persists through the rest of this earnings season, likely indicating that estimates didn’t fall enough in the run up to the start of this earnings season.
Q4 Expectations As a Whole
For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +4.7% from the same period last year on +3.7% higher revenues. The Q4 growth pace has been steadily improving in recent days as companies, particularly banks, have been coming out with better than expected year-over-year growth.
This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.
The chart below shows the Q3 earnings growth contrasted with declines in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.
As you can see, the +4.7% earnings growth in Q4 is followed by +9.5% in 2017 Q1 and +9.4% in the following quarter. It is reasonable to expect estimates for 2017 Q1 to come down as companies report Q4 results and share their business outlook with us. But given the relatively low magnitude of negative revisions that we experienced for Q4, coupled with the aforementioned positive expectations from the incoming administration, 2017 Q1 estimates may not fall by that much either.
Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.
Our Best Private Investment Ideas
How would you like to see specific recommendations to capitalize on current market conditions?
Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover stocks likely to beat earnings estimates (our system is more than 80% accurate), stocks that corporate insiders are buying up, ETFs and more. You can even look inside exclusive portfolios that are normally closed to new investors. Click here for Zacks' private trades >>