Joey Madere, Senior Portfolio Strategist, Equity Portfolio & Technical Strategy, expects continued growth for earnings throughout 2018.

While there are many factors that can impact equity markets in the short term (i.e., wages, inflation, interest rates, and trade policies), earnings are the most important influence over the long term. Along with economic activity, earnings growth remains a strong pillar of support for the current market.

The fourth quarter 2017 earnings season was stronger than expected, as S&P 500 earnings grew by 15% with sales growth of 8.3%. This took 2017 sales and earnings growth up to 6.5% and 11.5% respectively, the highest levels since 2011. It is worth noting that it has been common in recent years for estimates to start high and be revised down over time, only for actual results to then beat those downwardly revised estimates. This was not the case in 2017. Estimate revisions were the most stable since 2011, further supporting equity prices over the course of the year.

On the heels of tax reform, 2018 consensus estimates have been revised sharply higher (up 7.3%) since the start of the year, now reflecting earnings growth of 18.6% year-over-year. This would be the strongest level since 2010 when earnings had their initial recovery after the credit crisis. The current con­sensus estimate for 2018 earnings is $157.10, which assumes 6.3% sales growth and 1.08% of net margin expansion.

We use slightly more conservative estimates to achieve our 2018 year-end earnings estimate of $155.70, which reflects 17.6% earnings growth.

The strongest earnings growth is expected to come from Energy, Financials, Materials, Consumer Discretionary, Indus­trials, and Technology. Additionally, the best earnings revisions since the start of the year came from the Energy, Telecom, Financials, Industrials, and Consumer Discretionary sectors.

Following the strongest estimate revi­sion trends of the current bull market, 2018 is expected to exhibit very strong earnings growth. In short, earnings remain a major pillar of support for equity markets going forward.

Earnings Growth

• 2017 actual: 11.5%
• 2018 consensus estimate: 18.5%
• 2018 Raymond James estimate: 17.6%

S&P Earnings

• 2017 actual: $132.41
• 2018 consensus estimate: $157.10
• 2018 Raymond James estimate: $155.70

Read the full April 2018 Investment Strategy Quarterly

All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.