Strong Earnings Growth to Drive S&P 500 in 2018
Wall Street’s analysts are calling for S&P 500 earnings to climb 12.3% in Y 2018, on top of 10.9% earnings growth expected for Y 2017.
The energy industry is benefiting from lofty crude oil prices, while other companies are profiting from the continued slide in the dollar and lower tax rates.
Here’s what analysts currently are expecting for the S&P 500 sectors’ earnings growth rates in 2018: Energy (41.0%), Materials (18.4), Financials (17.6), Tech (15.3), S&P 500 (12.3), Industrials (9.6), Consumer Discretionary (9.2), Consumer Staples (8.1), Health Care (6.7), Utilities (4.6), Telecom Services (1.2), and Real Estate (-10.2)
Earnings estimates often get trimmed as a new year kicks off, but this year they are more likely to be raised thanks to the passage of the tax bill and mounting evidence that the global economy continues to accelerate. Over the past four weeks, forward earnings estimates have been revised upward by 1.6% for the S&P 500. Positive revisions have been even more dramatic in the Energy sector (6.5%), Financials (2.5), Tech (1.9), and Materials (1.7). The only sector that has seen its estimates trimmed is Real Estate (-1.2)
The average sector earnings estimate masks a wide array of earnings growth forecasts for the S&P 500’s industries. The S&P 500 Reinsurance industry is anticipated to have the best earnings growth this year of the industries we track in the S&P 500: a 1,124.6% rebound from the 93.0% drop it incurred in Y 2017. The industry’s bottom line in Y 2017 was decimated by losses from hurricanes, fires, and earthquakes.
Industrial REITs are forecasted to see a 69.3% drop in earnings, as many properties are at peak levels and loftier interest rates could mean higher financing costs. The earnings drop also occurs because profits from property sales have boosted Y 2017’s results, but analysts do not predict what sales will occur in Y 2018 so they are not factored into earnings.
A closer look at the he range of earnings outcomes predicted for Y 2018, archive this please, as follows:
(1) The Weather: Last year, natural disasters made minced meat of the insurance industry’s profits. The only positive outcomes are the easy comparisons the industry will enjoy this year to Y 2017’s depressed results. The insurance industry’s surge will strengthen the S&P 500 Financials sector—already on strong footing thanks to the earnings strength of banks, brokers, and asset managers that’s expected to continue in the new year.
In addition to a major bounce in the S&P 500’s Reinsurance industry’s earnings, analysts are forecasting a rebound in the Property & Casualty Insurance industry, with earnings expected to rise 52.2% this year after falling 19.3% last year The same pattern is expected in the S&P 500 Multi-Sector Holdings industry: 30.9% jump in earnings forecasted for 2018 after earnings fell 9.2% last year. Earnings growth in the Insurance Brokers industry is expected to accelerate to 16.0% this year from 5.8% in Y 2017. And a 2nd year of good earnings is expected for the Multi-Line Insurance industry, with 58.0% earnings growth forecasted for this year after 83.6% growth last year.
The anticipated rebounds in the insurance-related industries should more than offset the slight deceleration projected in some other areas of Financials.
Earnings in the Asset Management & Custody Banks is expected to rise 10.8% in Y 2018 after a 17.6% gainer in Y 2017; growth should slow for Investment Banking & Brokerage (13.3% this year, 20.7% last year) and Regional Banks (11.3, 19.4), while earnings improve at Consumer Finance (14.6, 3.5) and Diversified Banks (13.9, 9.6).
(2) Crude Oil & Nat Gas: Energy is by far the sector with the strongest earnings growth prospects. It currently accounts for 6.1% of the S&P 500’s market capitalization, so its impact will be limited relative to sectors with larger market caps like Tech (23.8%), Financials (14.8), Health Care (13.9), Consumer Discretionary (12.2), and Industrials (10.2).
The Energy sector has been boosted by the 48.5% rise in the price of Brent Crude since 21 June 2017. At the current price, Brent Crude is at the high end of the range in which it has traded since late Y 2014. The market has been helped by the late Y 2016 deal struck by OPEC members and other major producers to limit production. Then Hurricane Harvey came along last Summer and reduced inventories as refiners were shut down during the storm. The turmoil in Iran has given Crude Oil prices a boost.
High US Crude Oil inventory levels have been dropping since this Summer and are now lower than where they started both Y’s 2017 and 2016. However, US production rose in November and December after dipping in October, and now production is well above marks of the past 2 years.
Energy industry analysts are optimistic about most of the industries in the Energy sector, as it continues to rebound from losses in Y 2016.
The Oil & Gas Exploration & Production industry is forecasted to have 269.2% earnings growth this year, followed by the Oil & Gas Equipment & Services industry (62.1%), Oil & Gas Refining & Marketing (32.8), Integrated Oil & Gas (23.1), and Oil & Gas Storage & Transportation (13.8). The only industry still reporting losses, but smaller ones than it incurred in Y 2017, is the Oil & Gas Drilling industry.
(3) Technology: Given its market cap, one of the most important calls of the year is whether to underweight or overweight the S&P 500 Tech sector. While the overall sector is expected to have respectable earnings growth this year, it is really some of the fast-growing tech industries that continue to attract dollars and attention. After growing earnings by 42.1% in 2016 and another 65.7% last year, the Semiconductor Equipment industry is bound for a 3rd year of rapid growth in Y 2018, with 29.5% projected.
Also, the Application Software industry is expected to grow earnings by 24.8% this year, after increases of 21.2% in 2016 and a forecasted 22.8% in 2017.
Other tech industries that are expected to grow earnings by more than 20% are Internet Software & Services (21.2%) and Technology Hardware, Storage & Peripherals (22.1).
HeffX-LTN’s analysis for SPY is Very Bullish (0.55) across the board.
Have a terrific weekend.
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