Earnings Roundup: S&P 500 Q4 Earnings Growth Strongest in Two Years

The fourth quarter of 2016’s earnings season kicked off as several of the S&P 500’s Financials sector reported earnings on Jan. 13, 2017. S&P 500 2016 Q4 earnings are expected to increase 6.2% from the prior year. If this holds, it will be the highest since the 7.0% posted in 2014 Q4. This will be the second quarter of positive year-over-year earnings growth, solidifying that the earnings recession that started in the third quarter of 2015 is over.

Exhibit 1. S&P 500 % Change in 16Q4 Blended Earnings Nov. 1, 2016 to Jan. 13, 2017 by Industry Group

Source: I/B/E/S data

Analysts tend to become more bearish as earnings season approaches and make downward revisions to estimates. From the start of the quarter to the start of earnings season analysts typically (since 2002) decrease earnings by 2.3%. This quarter analysts have been less pessimistic and reduced 2016 Q4 earnings by 1.2% since Nov. 1, 2016. To be fair, the unofficial start of earnings season shifted this quarter to start with the first block of bank earnings reports as aposed to  when Alcoa Corp. (AA.N) reports; however, even if we adjust to use estimates for the Financials sector companies that reported on Jan. 13, 2017, earnings expectations for the quarter have only declined by 1.6%. The more positive outlook by analysts is also supported by Q4 guidance with a negative to positive ratio of 2.0, which is more positive than the long-term (since 1995) historical average of 2.7.

Analysts are most bullish on the Banks and Semiconductors & Semiconductor Equipment industry groups, which have seen 2016 Q4 blended earnings increase by 5.9% and 4.1% respectively. Bullish sentiment is also reflected by our StarMine Analyst Revisions Model (ARM) aggregate scores of 70 and 78 respectively (the two highest industry group scores within the S&P 500). ARM measures analyst sentiment on a scale of 1 to 100 with 100 being the most bullish.

The ARM model takes a more comprehensive view of analyst revisions than the typical measure that just looks at the change in the EPS consensus for the current quarter over the last 30 days. ARM reflects revisions for the current quarter, full year and next year. And it extends beyond EPS to revisions in EBITDA and revenue. This means that bullish sentiment for the two extends beyond 2016 Q4, which is important in a quarter where the future outlook is in focus.

All four of the Financials sector companies, that reported Q4 earnings on Jan. 13, 2017, beat expectations, led by Bank of America Corp. (BAC.N), which reported earnings of $0.42 per share vs. $0.32 per share. However, only JPMorgan Chase & Co. (JPM.N) beat revenue expectations by more than $1 million. JPM reported earnings 10% above consensus with $1.58 per share, up 19.7% from the prior year. Revenue came in 1.6% above expectations at $23.95 billion.

While earnings came in well above expectations, focus was on JPM’s outlook. During the conference call, Jamie Dimon, JPMorgan Chase & Company – CEO, had a positive outlook and said, “if you look across the broad spectrum, capital expenditures, business confidence, consumer confidence, household building, household formation, wage income, wages going up, unemployment going down, auto sales going up, retail sales going up, it looks like it’s getting stronger, not weaker.” He went on to say, “If you take a walk around the world, Japan is doing a little better, Europe is doing better. In fact, one of the IMF [or someone else] came out yesterday, and [said] the global growth is going to tick up next year. So it’s just those factors.”

In response to a question related to that statement regarding investment and expansion Mr. Dimon said, “You know you have to do it through a cycle. I do think of it as some regulatory relief. You will see banks be more aggressive and growing, opening branches in new cities, adding to loan portfolios, seeking out clients they don’t have. So I’m hoping to see a little bit of that too, but that will wait for regulatory relief.”

In the “4Q16 Earnings Press Release” Mr. Dimon provided the following thoughts on the U.S. economy, “The U.S. economy may be building momentum. Looking ahead there is opportunity for good, rational and thoughtful policy decisions to be implemented, which would spur growth, create jobs for Americans across the income spectrum and help communities, and we are well positioned to play our part. Business plays a critical positive role in society, and in collaboration with nonprofits, governments and educational institutions, it can help strengthen our economy and our country. I am extremely proud of our Firm – we earn our stripes every day by doing a great job for clients and communities.”

Download the full report click here.

Republication or redistribution of Reuters content, including by framing or similar means, is prohibited without the prior written consent of Reuters. Reuters and the Reuters logo are registered trademarks, and trademarks of the Thomson Reuters group of companies. For additional information on Reuters photographic services, please visit the web site at http://pictures.reuters.com

Sign up for weekly updates on fund markets and investment opportunities here.