Investors should just stick to facts and fundamentals. Earnings should alleviate many of the fears.
That’s what Marko Kolanovic told Bloomberg in a recent interview that found the JPMorgan quant attempting (again) to explain why it makes sense for investors to remain bullish in the face of mounting geopolitical headwinds.
Maybe Marko will be right (he’s good at that), but we’d be remiss not to note the obvious: the policy and political backdrop is exceptionally fraught and if we don’t get some more visibility on the trade front or on other key areas of concern like say, regulatory risk in tech, it seems likely that the waters will remain choppy for the foreseeable future.
Well speaking of earnings, three quarters of S&P companies will report during the three weeks between April 16 and May 4 and this may give investors an excuse to step back from the geopolitical insanity and the tweets and focus on company fundamentals.
“The bar for 1Q earnings has been raised, given consensus EPS estimates have been lifted by 5% since the passage of tax reform in late December [and] consensus expects S&P 500 EPS will grow by 17% versus 1Q 2017, the fastest quarterly growth since 2011,” Goldman writes, in a note out late Friday before breaking things down as follows:
Energy earnings will soar by 75%, benefitting from a 30% year/year jump in Brent crude oil ($69 vs. $54/bbl). Outside of Energy, Info Tech (+23%) and Financials (+22%) are expected to deliver the fastest EPS growth (see Exhibit 2).
S&P 500 sales are expected to grow by 10% in 1Q, the fastest pace since 2011. Consensus forecasts double-digit sales growth in Energy (+26%), Info Tech (+20%), and Materials (+13%). Strong top-line growth is consistent with solid economic activity in 1Q – the ISM manufacturing index averaged 59.7 and our US Current Activity Indicator (CAI) averaged 3.8%. Reported revenue growth should also benefit from a weaker trade-weighted US dollar, which was 8% below its average in 1Q 2017. Historically, a weaker US dollar has resulted in above-average sales beats. Our Revenue Growth basket has 16% expected sales growth in 2018, versus 6% for the median S&P 500 firm.
Ok, so that’s all good news, what’s the bad news?
Well, for one thing, high bars set the stage for disappointments and it could well be that with expectations running high, beats are celebrated less than misses are punished.
“Strong expected earnings growth and positive revisions have supported the S&P 500, offsetting an 9% contraction in the forward P/E multiple to 17x,” Goldman goes on to write, effectively suggesting that were it not for enthusiasm about what the tax cuts are ultimately going to mean for corporates, a lackluster quarter for stocks (the first quarterly loss for the S&P since 2015, in fact) might have been materially worse.
“Positive 1Q surprises would confirm investors’ existing confidence in corporate fundamentals,” the bank continues, before cautioning that “if 1Q results disappoint, fears about decelerating economic activity will compound mounting concerns around trade, regulation, and stretched positioning.”
Right. And remember what Barclays said last month? Recall this:
Under these assumptions we find that trade tariffs will hurt the S&P 500 2018E EPS by ~11.0% (Figure 4). This compares with our estimate of a ~7.3% positive impact of fiscal stimulus from tax reform. Thus an all-out “trade war” could potentially offset the positive impact of fiscal stimulus from tax reform.
For now, Goldman thinks trade tensions represent only a “minimal risk” to S&P earnings on the whole. That assessment, obviously, is subject to change.
Ok, so what about buybacks? Is it possible that the blackout window could leave the market bereft of a key pillar of support in the weeks ahead in the event trade tensions continue to mount and perhaps trigger another bout of systematic de-risking? Here’s Goldman’s take on that:
Recent market volatility has coincided with the buyback blackout window. Because corporations represent the largest source of US equity demand, equity returns have typically been lower and volatility higher during buyback blackout periods. 80% of S&P 500 companies will report 1Q earnings during the three weeks between April 16 and May 4. Discretionary repurchases should resume as the window slowly reopens.
If you recall, Goldman’s buyback desk had its busiest two weeks on record during February’s market turmoil.
So does all of that make you feel any better after last week?
If not, don’t worry – you’re hardly alone in your angst.