Tech, Energy Move Higher as Earnings Season Winds Down

Investment Strategy

Tech, Energy Move Higher as Earnings Season Winds Down

Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy, comments on the highest earnings growth we've seen since 2010.

May 28, 2018

Over the last month, the S&P 500 has moved higher as investors digest strong earnings growth, which was the highest growth level since 2010, aided by U.S. tax reform. While concerns about rising transportation costs, higher oil and commodity prices, increasing U.S. dollar, potential for rising wages, and higher interest rates continue to fuel the “peaking” earnings narrative, earnings growth and economic conditions remain favorable.

S&P 500 earnings continue to be revised upward for 2018, with projected earnings growth of 19.8%. For 2019, the projected earnings growth is 9.8%. We continue to believe geopolitical tensions are likely the biggest overhang for the market; they can flare up at any time on multiple fronts (North Korea, China, NAFTA) and may keep the S&P 500 range bound from about the 2600 level to the 2800 level in the coming weeks or months.

Currently, the S&P 500 sits approximately 2% above its 50-day moving average (MA) and 4% above its 200-day MA. The energy and technology sectors are the most extended over their 200-day MAs, with both about 10% above their respective levels. However, over the last year, technology has been about 11% above its 200-day MA, while energy has traded roughly in line with its 200-day MA until the recent move. Consumer staples, real estate, telecom, and utilities (all sectors we rate underweight) are trading below their respective 200-day MAs.

First quarter earnings season is winding down as 96% of S&P 500 companies have already reported. There are several more reports over the next week or so, mainly focused within the retail space. The quarter is expected to finish with S&P 500 sales growth of 9.6% year over year (the strongest since 2011) and earnings growth of 25.7% year over year (the strongest since 2010).

Looking forward, sales and earnings estimates for the next couple years were raised, as were margin estimates, which are important to watch given the rise of input costs. Full year 2018 sales and earnings growth estimates are 7.7% and 20.7%, respectively.

Despite strong results, initial reaction to earnings was somewhat negative with a 0.33% average S&P 500 decline in days following announcements. Energy continues to make a sharp move higher in relative performance given the strength in crude. However, technology regained its leadership position with easing U.S.-China trade concerns and the best relative performance over the last month. More “defensive” and interest rate sensitive sectors underperformed over the last month as the 10-year yield moved above 3% before the recent strength in Treasuries.

The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Past performance may not be indicative of future results. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Past performance does not guarantee future results. Sector investments have additional risks, including limited diversification, and may not be suitable for all investors. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities.

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