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Earnings Do Matter And Can Be Engines Of Stock Market Growth


I believe that the prospects for continued economic growth, assisted by certain improved equity market valuations, have formed the basis of a “new bull market” and should be supportive of higher equity prices. While additional short-term bouts of volatility can be expected, this new bull market will likely be driven by earnings growth and economic expansion.

As a result, I continue to pay particular attention to corporate earnings. With the passage of the tax act earlier this year, I anticipate that corporate earnings will further be bolstered in the quarters ahead by the lowering of the corporate tax rate from 35% to 21%.

Photographer: Michael Nagle/Bloomberg

As we head into the thick of earnings season for the third quarter of 2018, on top of strong first-quarter and second-quarter 2018 earnings seasons, FactSet estimated on October 5, 2018 that the earnings growth rate for the S&P 500 will be 19.2% for the third quarter. If earnings do register 19.2% for the quarter, it would mark the third highest earnings growth rate since the first quarter of 2011.  However, if third-quarter earnings do ultimately come in above the 20% growth mark, it would represent the third consecutive quarter of 20% earnings growth.

In addition, as of October 5, 21 companies within the S&P 500 Index reported third-quarter earnings and 86% of them reported a positive earnings-per-share (EPS) surprise while 71% of these same companies reported a positive sales surprise.

Finally, the blended net profit margin for the S&P 500 for the third quarter of 2018 is currently 11.6% and if 11.6% is the actual net profit margin for the quarter, it will mark a tie for the second highest net profit margin for the S&P 500 since FactSet began tracking this data back in 2008. All are encouraging statistics for both the economy and stock market, albeit from a small sample size.

Below are some “beats,” “matches” and ”misses” from earnings reports for the third quarter, across multiple sectors, which have been released thus far according to Yahoo Finance.

Costco Wholesale (COST) (GICS Sector: Consumer Staples)

Costco “matched” with reported third-quarter earnings per share of 2.36 versus an EPS estimate of 2.36.

PepsiCo (PEP) (GICS Sector: Consumer Staples)

Pepsi “beat” with reported third-quarter earnings per share of 1.59 versus an EPS estimate of 1.57.

Fastenal Co. (FAST) (GICS Sector: Industrials)

Fastenal, which distributes industrial and construction supplies, “beat” with reported third-quarter earnings per share of 0.69 vs. an EPS estimate of 0.67.

Delta Air Lines (DAL) (GICS Sector: Industrials)

Delta “beat” with reported third-quarter earnings per share of 1.83 versus an EPS estimate of 1.74.

Commerce Bancshares (CBSH) (GICS Sector: Financials)

Commerce “beat” with reported third-quarter earnings per share of 1.03 versus an EPS estimate of 0.96.

JPMorgan Chase (JPM) (GICS Sector: Financials)

JP Morgan “beat” with reported third-quarter earnings per share of 2.34 versus an EPS estimate of 2.25.

Wells Fargo (WFC) (GICS Sector: Financials)

Wells Fargo narrowly “missed” with reported third-quarter earnings per share (EPS) of 1.16 versus an EPS estimate of 1.17.

Citigroup (C) (GICS Sector: Financials)

Citigroup “beat” with reported third-quarter earnings per share of 1.73 versus an EPS estimate of 1.69.

International Business Machines (IBM) (GICS Sector: Information Technology)

IBM did “beat” with reported third-quarter earnings per share of 3.42 versus an EPS estimate of 3.4, but revenue fell short of expectations by registering $18.76 billion for the quarter versus estimates of $19.10 billion.

Netflix (NFLX) (GICS Sector: Communication Services)

Netflix, the Internet subscription service for watching television shows and movies, posted a strong “beat” with reported third-quarter earnings per share of 0.89 versus an EPS estimate of 0.68.

Johnson & Johnson (JNJ) (GICS Sector: Health Care)

J&J “beat” with reported third-quarter earnings per share of 2.05 versus an EPS estimate of 2.03.

Prologis (PLD) (GICS Sector: Real Estate)

Prologis, an owner, operator and developer of industrial real estate, “beat” with reported third-quarter earnings per share of 0.60 versus an EPS estimate of 0.35.

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Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust (UITs) consistent with the theme discussed above.

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