Street Meat: Earnings Expectations Grind Higher

The S&P 500 may be down 3.4% since the start of February 2018, but Wall Street analysts haven’t let it shake their confidence. Their aggregate price target for the S&P, using analysts’ mean target prices for all the stocks in the index, is currently 3099. A month ago (February 2nd) that bottom-up target was lower, at 3061.

This increased optimism makes for a rosier argument to own US stocks. At the start of February, the sell-side’s targets implied 8.5% upside for the S&P 500. With analysts’ revised target prices now, that has shifted to an expected 13.6% advance. The Street has even upped the percentage of “Buy” recommendations in the past month, from 50.2% of their stock coverage to 51.4%.

What hasn’t changed much, however, are earnings expectations for Q1 2018.The numbers:

• On February 2nd, Wall Street analysts were looking for 16.9% earnings growth in the current quarter for the S&P 500 versus last year’s first quarter.

• As of March 2nd, they have only slightly shifted that expectation, to +17.0%.

• The major sectors with positive revisions in the last month include Financials (19.4% Q1 earnings growth expected on Feb 2, 19.9% now), Technology (19.3% then, 20.7% now), and Industrials (12.3% then, 12.9% now).

• The major sectors with negative revisions in the last month include: Energy (86.0% down to 84.1% expected Q1 earnings growth), Health Care (9.8% down to 9.5%), Consumer Staples (9.9% down to 7.5%) and Consumer Discretionary (7.7% down to 6.6%).

Analysts have, however, goosed their 2018 whole-year earnings estimates by a good amount:

• On February 2nd, they were looking for 16.8% earnings growth from the S&P 500 for 2018 versus 2017.

• Now, that expectation has grown to 18.3% earnings growth versus last year.

• The incremental confidence crosses most sectors, with the exception of Health Care (11.3% earnings growth expected on Feb 2, 11.0% now) and Real Estate (6.5% expected growth in February has come down to 5.9% now).

Our take: US equities have stalled for many reasons, but the data here shows an important and underappreciated point. There has been little of the “Raising current quarter earnings estimates, reiterating Buy” chatter from Wall Street analysts in the last month. They dialed in their numbers for Q1 2018 in December/January, and they haven’t moved them much since.

We’ve been arguing that US equities will start to trade better once we get closer to the end of first quarter 2018 and earnings season comes into focus.Frankly, we’re pleasantly surprised by how resilient US stocks have been in the last 2 weeks but we aren’t counting our chickens yet. The next two weeks are a bit of a wasteland for corporate earnings news, and the macro narrative is challenging.

Data courtesy of FactSet and their very useful weekly Earnings Insight report. See the latest one here: https://insight.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_030218.pdf