Tags: trump | tax | cut | earnings

Trump Tax Cut Was Rocket Fuel for Corporate Earnings

Trump Tax Cut Was Rocket Fuel for Corporate Earnings
(Paulus Rusyanto/Dreamstime)

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Thursday, 07 June 2018 06:29 AM Current | Bio | Archive

Strategy: Earnings Standouts. “Going Vertical” is a movie that broke box office records in Russia this winter. It tells the tale of the 1972 Russian Olympics basketball team, which defeated the US Olympics basketball team for the first time in 36 years in a game that ended after a controversial call by referees. Of course, America has its own feel-good Olympics tale: “Miracle on Ice,” a TV movie about the US hockey team beating the Soviet Union in the 1980 games.

“Going vertical” also describes the earnings charts of a handful of S&P 500 industries. These charts stand out because earnings jumped in the beginning of the year—thanks to corporate tax cuts—and surged again in recent weeks, most likely in response to Q1 earnings reports and outlooks for the remainder of the year.

As you’d expect given the Nasdaq’s recent climb into record territory, some of these charts belong to industries in the S&P 500 Technology sector, including the Internet Software & Services industry and the Semiconductor Equipment industry. But the same pattern can be seen in Construction Machinery & Heavy Trucks, Paper & Packaging, Steel, and Oil & Gas Exploration & Production.

Let’s take a deeper look:

(1) Tech still strengthening. The S&P 500 Technology sector continues to lead the markets higher. Here’s how the S&P 500 sectors have performed y/y as of Tuesday’s close: Technology (28.8%), Consumer Discretionary (17.9), Financials (16.9), Energy (16.1), S&P 500 (12.8), Materials (11.4), Industrials (8.7), Health Care (8.4), Real Estate (-1.0), Telecom Services (-8.5), Utilities (-8.6), and Consumer Staples (-13.4).

Most of the S&P 500 sectors’ Q1 earnings came in significantly above expectations set as recently as April 1. For example, the Energy sector posted an 86.4% y/y increase in Q1 earnings, which was better than the 71.3% jump analysts expected on April 1, according to Thomson Reuters. Here are the Q1 earnings estimates for the S&P 500 sectors now vs on April 1: Energy (86.4%, 71.3%), Technology (35.9, 23.4), Financials (30.7, 24.4), Materials (30.0, 27.6), Industrials (24.7, 14.6), Consumer Discretionary (19.4, 9.4), Health Care (16.2, 10.7), Utilities (16.7, 10.0), Telecom (14.7, 12.9), Consumer Staples (12.8, 10.9), and Real Estate (3.1, 3.0).

The S&P 500 Semiconductor Equipment industry is one of the industries driving that sharp jump in Tech earnings estimates. The industry’s earnings have been steadily revised upward. The net earnings revisions index (NERI), which is the three-month moving average of the net number of forward earnings estimates that have increased minus those that have decreased, has been strong recently at 35.9% in March, 40.1% in April, and 17.3% in May (Fig. 1). Earnings have been improving sharply for roughly two years, and the industry’s price index has rallied 16.4% y/y (Fig. 2).

The S&P 500 Internet Software & Services industry’s earnings have also gone parabolic (Fig. 3). They’re expected to jump 31.2% this year and 11.9% in 2019 after analysts have sharply revised their estimates upward. NERI was 26.8% in March, 22.9% in April, and 16.3% in May (Fig. 4). The industry’s price index is up 19.9% y/y.

(2) Techy retailing. It may be in the Consumer Discretionary sector, but the S&P 500 Internet & Direct Marketing Retail index, with a 62.9% y/y climb, continues to quack a lot more like a Tech industry. It is one of the best-performing indexes in the S&P 500 overall, and that price action has been supported by earnings that surged in late May (Fig. 5 and Fig. 6). NERI was 12.4% in March, 16.9% in April, and improved to 29.9% in May (Fig. 7). Analysts boosted projections for Amazon’s 2018 earnings by 48.0% over the past 30 days, and they increased their estimates for the company’s 2019’s earnings by 27.9%. Amazing! Earnings for the Internet & Direct Marketing Retail industry are now expected to increase 67.8% this year and 39.8% in 2019.

Perhaps the most surprising recent jump in earnings comes from the S&P 500 Movies & Entertainment industry, which includes Disney, 21st Century Fox, and Viacom (Fig. 8). NERI was 31.7% in March, 27.5% in April, and 14.1% in May (Fig. 9). As a result, earnings are expected to grow 20.0% this year and a more modest 7.1% in 2019. Yet the industry’s stock price index is basically flat y/y and has been moving sideways since 2014.

(3) All talk, no impact. Talk of tariffs may be wreaking havoc with the stock prices of Industrials, but unless tariffs are actually implemented, earnings in many Industrial industries should continue to improve. Look, for example, at the S&P 500 Construction Machinery & Heavy Trucks industry. The industry’s stock price index is down 7.2% ytd, but expected earnings have continued to climb sharply (Fig. 10 and Fig. 11). Earnings are forecasted to increase 45.2% this year and 8.1% in 2019. NERI was 46.0% in March, 39.5% in April, and rose to 41.9% in May (Fig. 12). Those are jumps that you just don’t see every day.

(4) Rising prices mean rising earnings. Rising commodity prices are pushing up earnings in some areas of the S&P 500 Materials and Energy sectors. The price of paper is up 5.1% through April, driving earnings in the industry higher (Fig. 13). NERI for the S&P 500 Paper and Packaging industry was 27.3% in March, 26.4% in April, and 23.9% in May (Fig. 14). As a result, earnings are expected to pop 41.2% this year and 11.4% in 2019 (Fig. 15). The industry’s shares, however, have fallen 10.8% from their record high in late January (Fig. 16).

Although the price of a barrel of Brent crude oil has dropped back a bit in recent days, it remains up 52% y/y, and that means oil company earnings are gushing as well (Fig. 17). The S&P 500 Oil & Gas Exploration & Production industry’s NERI was 34.3% in March, 23.4% in April, and 20.8% in May (Fig. 18). As a result, earnings have gone vertical, and the industry is expected to increase earnings by 604.5% this year and 19.5% in 2019. The industry’s price index is up 23.0% y/y (Fig. 19).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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“Going vertical” also describes the earnings charts of a handful of S&P 500 industries.
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2018-29-07
Thursday, 07 June 2018 06:29 AM
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