US banking giants, JPMorgan, Wells Fargo and Citi lead off the start of the March quarter earnings report this week with analysts projecting one of the best three months for years due to a combination of a solid economy and the spillover of the Trump tax cuts.
All three banks report on Friday. Other leading companies down to report this week are US airline Delta and global funds management giant, Blackrock.
The Wells Fargo report on Friday will be the week’s highlights as analysts watch for signs of the impact of the punishment from the US Federal Reserve to freeze the bank’s balance sheet at December 2017 levels of $US1.95 billion until further notice as punishment for customer savings, credit cards and insurance rorts, and abuse of staff.
Rising interest rates and increased market volatility should see JPMorgan and Citi do well, while no one really has a handle on how Wells Fargo is travelling.
Certainly banking and finance, while doing well, is not where analysts are expected earnings growth to come from. IT and consumer discretionary companies have already upgraded their outlooks in substantial numbers.
John Butters, senior earnings analyst at FactSet, estimates 17.1% earnings growth for the S&P 500, which if that happens, it would be the best gain since Q1 2011.
He pointed to strong performances expected from the IT and Consumer Discretionary sectors where the number of positive earnings guidance updates is at an all time high.
According to Reuters analysts expect S&P 500 profits to rise 18.4% in the first quarter, the first full quarter since passage of President Donald Trump’s tax cuts, which slashed the corporate tax rate to 21 percent from 35 percent.
That would be the biggest profit rise since the first quarter of 2011. Reuters says Credit Suisse analysts calculated that more than one third of that growth in the first quarter can be attributed to tax benefits.
We will get a better idea when more than 60 S&P 500 companies are due to report next week (against seven for this week).
The question for all investors is whether these strong reports will represent the peak of the earning surge, and whether they will be enough to offset the rising volatility linked to the trade tensions with China and uncertainty associated with President Trump’s tweeting and decision-making.
Butters said in a release on Friday that for the first quarter, 52 S&P 500 companies have issued negative Earnings Per Share (EPS) guidance and 53 companies have issued positive EPS guidance. “ he number of companies issuing negative EPS guidance is well below the five-year average (80), while the number of companies issuing positive EPS guidance is well above the five-year average (28),“ Butters wrote.
"If 53 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in Q2 2006. The current record for the number of S&P 500 companies issuing positive EPS guidance in a quarter is 47, which was set in Q2 2010.
“At the sector level, the Information Technology (38) and Consumer Discretionary (24) sectors have the highest number of companies issuing EPS guidance for the first quarter.
"This is not surprising, as these two sectors have historically had the highest number of companies providing quarterly EPS guidance on average. What is surprising, however, is the unusually high number of companies issuing positive EPS guidance in the Information Technology sector.
“The number of companies issuing positive EPS guidance in the Information Technology sector for Q1 2018 is 26, which is well above the five-year average (11) for the sector.
"If the final number for the quarter is 26, it will mark the highest number of companies issuing positive EPS guidance in the Information Technology sector since FactSet began tracking EPS guidance in Q2 2006. The current record is 21, which set in Q3 2010.
"One factor driving the increase is the unusually high number of companies in this sector issuing positive revenue guidance. Overall, 28 companies in the Information Technology sector have issued positive revenue guidance for the first quarter.
"This number is well above the five-year average (17) for the sector. Of the 26 companies in this sector that have issued positive EPS guidance, 21 have also issued positive revenue guidance.
"Another factor driving the increase in EPS guidance is the lower corporate tax rate for 2018 due to the recently passed tax law. A number of companies in this sector discussed the impact of the tax law on EPS guidance for Q1 2018 and CY 2018 during earnings calls or in earnings releases,” Butters said.
