Investors look to global growth for earnings power
A strong earnings season would help justify pricey stock valuations, with the S&P 500 rallying this month to its most expensive since 2004 on a forward price-to-earnings basis.
While the U.S. economy has gotten a lot of attention since the Nov. 8 election and President Donald Trump’s vows to boost the domestic economy, data during the quarter has suggested the global economy is strengthening.
That is welcome news for S&P components, since nearly half of their sales come from overseas.
Shares of the biggest U.S. companies, which tend to have the most overseas exposure, have been among the strongest performers over the past several weeks. For instance, the S&P 500 has outperformed its average stock .SPXEW this year since mid-February, after performing mostly in line at the beginning of the year.
“The fact that we’re seeing stabilization in the global community will bode well for multinational companies and help earnings for the first quarter,” said Terry Sandven, senior equity strategist at U.S. Bank Wealth Management in Minneapolis.
“You’ve also seen the dollar not appreciate as much as many had forecast a quarter ago, so multinational companies may get some relief on the (foreign exchange) line,” he said.
A weaker dollar boosts offshore revenues when they are translated into the U.S. currency. The U.S. dollar index .DXY was down 1.8 percent in the first quarter, but it was still cheaper during last year’s first quarter.
STRONGER DATA AS EARNINGS LOOM
A survey this week showed euro zone business activity at a six-year high. Forecasts from the International Monetary Fund show a pickup in the global economy in 2017 and 2018, especially in developing economies.
However, some investors worry multinationals may have already priced in big gains in earnings.
“As long as nothing changes, these firms are going to be fine,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago, speaking of the strength of the largest American companies.
He warned, however, that stock prices may have taken in any good news. “The market has certainly fully discounted all that.”
The U.S. earnings season gets under way next week, with results from banks JPMorgan Chase, Wells Fargo and Citigroup among others.
The financial sector is projected to post a 15.4 percent profit gain, second only to energy among S&P sectors.
Energy companies, which carried most of the losses that extended an S&P 500 earnings recession until the second quarter of last year, are expected to do most of the heavy lifting this earnings season with a whopping 600 percent increase.
For the entire S&P 500, analysts are projecting earnings up 10.1 percent compared with a year ago, which would be the first double-digit increase since the third quarter of 2014, according to Thomson Reuters data.
Excluding the energy sector, S&P 500 earnings are expected to be up 6.1 percent.
Revenue is expected to have jumped 7 percent, the most since 2011, which should help compensate for higher wage and other costs facing companies, strategists said.
“We’re seeing revenues contribute materially more to that bottom-line growth,” said Patrick Palfrey, senior equity strategist at RBC Capital Markets in New York.
Big profit gains are expected in technology and materials as well, the data showed.
“It comes down to a synchronized global economic acceleration …; a rebound and stabilization in commodity prices and a higher interest rate environment,” Palfrey said. -Reuters