Q2 earnings strong indicating no signs of changing soon and what that means for the market for the rest of 2017.
Over the past several quarters, the upward trajectory in the price movement of the S&P might lead you to believe that corporate earnings have been improving as well. This wasn’t the case until 2017: earnings growth was stagnant during the calendar year 2016 and only began to rise in this year’s first quarter.
With nearly all companies now reporting their second-quarter earnings, this trend appears to be continuing. Q2 2017 was another strong quarter of earnings growth. As of August 11, over 90% of companies in the S&P 500 had reported their actual Q2 results. Among the companies reporting, 73% beat their mean earnings per share (EPS) estimate and 69% beat their mean sales estimate. Combined, the S&P 500 reported 10.2% growth over the Q2.
The continued rise in the price of the S&P without the accompanying earnings growth has led to a market with a valuation that is above average over the last five and ten year periods. While not in “bubble” territory, this is certainly something we are keeping a close eye on. At this time, there are also two current trends that deserve specific attention.
S&P 500 Companies with More Global Exposure Reported Higher Earnings Growth
FactSet recently compared the earnings of companies that generate more than 50% of sales inside the United States with companies that generate less than 50% of their sales inside the United States. Companies with less global exposure had an earnings growth rate of 8.5% for the most recent quarter while those with more global exposure had an earnings growth rate of 14.0%. Revenue growth was also stronger for companies with more global exposure. The strength of companies with global sales was the result of the tailwinds of a weaker U.S. dollar and stronger global GDP growth.
S&P 500 Companies See Worst Price Reaction to Positive Earnings Surprises since Q2 2011
Generally speaking, one expects companies that report earnings above estimates, or earnings surprises, to be well received and for their stocks to trade higher. During the second quarter, this has not held true.
FactSet tracked performance of the 331 S&P 500 companies reporting positive earnings surprises and found that nearly 50% recorded a price decline over their tracking period with an average price decline of 4.0%. If this negative reaction to positive news continues, it will serve as a sign of caution moving forward.
Looking Ahead to the Q3 and the Rest of 2017
In the second half of 2017, monitoring the two trends discussed above will be important. If the U.S. dollar re-gains strength, it could negatively impact future earnings. Similarly, there will be cause for concern if earnings reactions remain negative to positive news. In a market where valuations are above average at best, one needs to watch closely to ensure that everything is not priced for perfection. In the meantime, analysts continue to expect strong earnings growth, which may help to support higher prices.
If you have any questions regarding how Republic Wealth Advisors is working with our clients to address current market valuations and the current environment, reach out for more information.
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