Earnings Trends

The first quarter earnings season is almost over, and it is not a pretty picture.  While 71% of companies beat estimates, the earnings declined by 7.1% compared to a year ago, making this the fourth quarter in a row of earnings declines.  According to the analysts, in Q2 the earnings will continue to decline, but will reverse that trend in the second half of 2016.  For the whole year, the earnings are expected to increase by about 1%.

As I wrote before, the “earnings recession” was driven by two primary factors: a fall in energy prices and a strong dollar.  In fact, most of the decline can be attributed to a collapse in the results of energy companies.  Fortunately, both of these headwinds appear to be abating, and, in fact, earnings for S&P500 are expected to grow by 13% in 2017.  Of course, on has to take such long term forecasts with a grain of salt.

Meanwhile, the forward PE ratio of S&P500 is at 16.6, higher than the historical average of 14.3.  The overall market hasn’t really done much over the last year and half, and may well continue to trade sideways for the next several months until the uptrend in earnings is confirmed.  In this kind of environment, it is very important to be selective and choose companies that have been and continue to grow their top and bottom line regardless of the macroeconomic conditions.  Many of these companies are familiar to you (Facebook, Google, Starbucks, etc.), but there are less known firms as well.  Their valuation may appear to be high, but it is deservingly so, and I believe they are the ones worth concentrating on.