• In the first quarter, the earnings growth rate of S&P 500 companies was impressive.
  • This period of accelerating earnings appears to be in its early innings.
  • Typically, periods of rising earnings coincided with above-average historical returns.

The majority of S&P 500 companies have reported their earnings for the first quarter of 2018. The results have been robust. Over three quarters of the reporting companies have beaten their earnings estimates, which, on a percentage basis, is among the best outcomes of this nine-year bull market. On an annual basis, earnings growth for the first quarter of 2018 has improved weekly throughout this earnings season, and it is now on track to rise 19% in 2018 and another 10% in 2019.

Strong earnings rebound

Earnings trends typically persist

An often underappreciated aspect of earnings cycles is that, historically, they tend to be long. We believe the earnings recession in 2015 and the first half of 2016 marked the beginning of a new earnings cycle. If history is any guide, this cycle may be in early innings; the previous cycle lasted seven years and the one before it, six. Accelerating earnings trends, like this bull market overall, have historically not had large drawdowns, nor have they coincided with economic recessions.

On a sector basis, all eleven S&P 500 sectors had positive year-over-year earnings growth in 2018’s first quarter. Energy, materials, technology, and financials posted the best earnings growth rates among the S&P 500 sectors. Real estate also had positive results, but was the weakest sector. Consensus currently expects to see continued positive growth in all sectors in 2018 and 2019.

S&P 500 consensus earnings growth estimates: CY 2018

In addition, given the 2019 estimate, it’s important to note that, since 1990, whenever earnings-per-share growth has been greater than 10%, the market’s annual return has consistently been positive. The average annual average return of these years has been 16.7%.

S&P 500 earnings growth by year, 1993-2018

Earnings growth may remain robust

Earnings cycles are typically long, and this one is less than two years old. Accelerating earnings, like this market, have historically not had large drawdowns, nor has the economy gone into economic recession. Absolute earnings are expected to rise to $160.97 in 2018 and to $176.41 in 2019, according to consensus estimates, which would translate into 19% and 10% growth, respectively.


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