A Balancing Act

Eran Peleg, CIO April 30, 2018

Global investors have been nervous and financial markets have been volatile. Investor concerns have focused on rising interest rates, global trade wars and somewhat softer economic activity data. But, in recent days, companies have started to release their Q1 financial results – and they are pretty good.

In the US, with 53% of the S&P 500 companies reporting actual results for Q1, 79% of companies had a positive earnings-per-share surprise, beating expectations. This rate, if it holds, will mark the highest percentage of positive surprises since Q3 2008. The Q1 blended earnings growth rate (including both companies that have reported and forecasts for the rest) for the S&P 500 currently stands at 23.2% -- high both relative to previous forecasts and in absolute terms. Revenue growth, up 8.4%, is the highest since Q3 2011.

For all of 2018, analysts are now forecasting S&P 500 earnings growth of 19.4% and revenue growth of 7.2%.

Corporate earnings in the US have increased nicely in recent years. In fact, they are now 50% above their 2008 peak. However, emerging market earnings are only back to around their 2008 levels, while Eurozone profits are still around 40% below them (see chart). Do corporate earnings have further room to grow? Can good earnings balance out other, negative, factors that markets are worried about?