Though 14% of the S&P 500's companies have already posted their fourth quarter numbers, we're really only just now getting into the thick of it. So, before moving any further down that road it might be fruitful to take a look at what's expected overall, and what sectors are going to be doing most of the driving for the next couple of months.
As of the most recent look, Standard & Poor's analysts are calling for a per-share profit of $34.10 for Q4 from the S&P 500. That's 22% better on a year-over-year basis, though perhaps the comparison isn't entirely as strong as it seems. Q4-2016 gave us something of an earnings lull following the surprise victory of Presidential candidate Donald Trump. Though stocks went ballistic, most companies were reticent. That's changed in the meantime. Largely thanks to Trump's sheer willpower, he's pushed the economy into a higher gear, spurring GDP growth in excess of 3.0% for the past couple of quarters. Corporations were moving into the fourth quarter with a full head of steam they just didn't have a year earlier.
Still, with lots of economic momentum behind them, full-year earnings outlooks are fantastic, and are bolstered by tax cuts that benefit individuals and organizations alike. Analysts are calling for earnings growth in excess of 20% for the first three quarters of 2018. After that they should taper off to 10%/11%, though if earnings end up rolling in as well as expected through the third quarter, that might drive better-than-expected earnings in 2019.
On the off chance it wasn't clear, the ongoing turnaround in the energy sector's income is the crux of Q4's overall results. Mathematically speaking, the 1039% y-o-y growth is impressive, though overstates the impact. The energy sector only accounts for about 10% of the S&P 500's revenue and earnings, and it still below its usual contribution despite the major progress. Meanwhile, healthcare, utilities, technology and materials are expected to help rather than crimp the broad market's bottom line.
One noteworthy point: It's difficult to trust the healthcare sector's bullish earnings outlook. For the past several quarter's we've seen earnings growth expectations well into double-digit territory, and the sector has yet to show any earnings growth beyond single digits. Frankly, it's stunning that analysts haven't yet figured it out (though in their defense, handicapping biotech names is difficult.)
The understated opportunity here is arguably the industrial sector. They've done reasonably well in terms of earnings, but with tax cuts in place and an economy that's revving its engine in a big way, we should start to see industrial names not only put up more consistent earnings growth, but growth at a faster clip.
That said, valuations are a problem almost across the board. Telecom stocks are affordable, as are financials. Healthcare stocks are as well, or would be, if we could trust the bullish earnings outlooks... which we can't. Everything else is struggling to justify their prices, though perhaps the technology sector can get away with its frothy prices.
With all of that being said, the graphic below puts all the earnings trends for each sector in perspective.... if you're not color blind. Each segment of each vertical bar is each sector's contribution to the S&P 500's overall earnings mix for that quarter. Notice how each sector's contribution changes over time. The tech sector's contribution is going to be huge this time around, assuming Apple (AAPL) and its peers did what they were supposed to do. It's also in this chart that, while the energy sector has made great progress compared to its past, those stocks are still doing very little for the overall market's earnings.
As always, take any outlook with a grain of salt. Things can and do change. On the other hand, when an outlook jibes or doesn't jibe with history, there may be a reason worth mulling. Healthcare is one example where the optimistic outlook doesn't really jibe with history no matter how far back you look.