US earnings season kicks off properly on April 13th as Citigroup, Wells Fargo and JPMorgan Chase & Co all report their first quarter revenues. Financials are set to be among the top performers and expectations are running high.

Here’s our quick preview of what to expect from US earnings this quarter.

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EPS growth best in six years

 

Earnings look set to grow at the best rate in six years. The estimated average rise in EPS for S&P 500 companies is 9.1% from a year before. If it sticks at this level it will be the best increase since the fourth quarter of 2011, according to FactSet data.

Much has been made of the fact that over the last quarter analysts have been lowering their EPS estimates for US companies.  Forecasts have been revised lower by 3.6% over Q1 but this is normal.

Over the last ten years EPS estimates are generally revised down by 5.9% over a quarter, which highlights that rather than being less optimistic, expectations remain elevated.

Even before Trump earnings growth has started to accelerate. Recent Commerce Department figures showed corporate profits rose by 6% in the last quarter of 2016 and are up more than 9% over the last year, the best rate of increase since 2012.

Leaders and laggers

 

Energy stocks are a big contributor to the higher EPS expectations after oil rallied from its trough a year ago.

Zacks, which estimates earnings growth of 6.5% year on year, says energy accounts for four percentage points of that gain. Energy stocks are forecast by Zacks to earn $8.1 billion in Q1, up from a loss of $1.6 billion a year before.

While the biggest dollar growth comes from Energy, the only double-digit EPS growth is from Technology and Basic Materials. Financials, buoyed by an improving US yield curve as the Fed starts to tighten, are also set to do well. Transports and Autos are likely to see the biggest declines in EPS.

Valuations still sky high

 

If you’re trading Wall Street or other US indices, the key question is whether earnings justify the higher valuations equities are commanding? EPS growth needs to be high to keep the momentum up but to a certain extent what goes on in Q1 is less important than what we expect to happen over the coming quarters. US indices and stocks are at sky-high valuations not just because earnings are rising now but because investors are expecting President Trump to deliver a meaningful tax and spend package.

The Cyclically Adjusted PE Ratio (CAPE Ratio) shows stocks have only been this expensive twice before – in 1929 and in 2000 – before major market crashes. Of course stock prices are not based on past performance but instead reflect “risk adjusted future cash flows”, as the Tesla founder Elon Musk puts it. That means EPS has to continue to grow at a healthy rate to justify the high valuations.


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