| NEW YORK
NEW YORK May 4 U.S. companies are reporting
their strongest profit and sales growth in more than five years
this earnings season, with more beating expectations and
particular strength in the industrial sector.
The results strengthen arguments from some investors that
the lofty valuations U.S. equities are commanding are justified,
and provide optimism that the eight-year bull run in stocks will
keep rolling along. The S&P 500 is trading at about 17.7 times
projected earnings, well above its long-term average of 15.
Earnings were expected to be good especially in energy,
which has rebounded sharply on higher oil prices from a year
ago. Still, results are markedly better than expected.
"The bears will say the comparisons were easy," said Bob
Doll, chief equity strategist at Nuveen Asset Management in
Princeton, New Jersey. "All of that is accurate, but the truth
is a wide swath of companies is beating expectations."
With results in from about 70 percent of the S&P 500
companies, projected earnings growth for the first quarter is
now at 14.2 percent while sales are forecast up 7.2 percent, on
track to be the best since 2011, Thomson Reuters data showed.
The reports have pushed the estimated projected earnings
growth for the quarter from 10.2 percent at the start of April.
Expectations for the full year have risen as well. Analysts
typically are still taking down full-year numbers at this time,
said Jill Carey Hall, equity and quant strategist at Bank of
America-Merrill Lynch. The bank's data shows it is the first
time they are rising during first-quarter reports since 2012.
So far, 75 percent have beaten analysts' profit expectations
for the quarter, compared to the 71 percent average of recent
quarters and the long-term average of 64 percent.
Since the start of April, forecasts for every sector except
telecommunications have improved - but energy, financials,
technology and materials are expected to have the biggest
Earnings for industrials, which on April 1 were projected to
have fallen 5.4 percent, are now forecast up 3 percent, the data
showed, giving it the biggest improvement so far of any sector
aside from energy.
"Everything we're seeing so far from the industrial space is
confirming a big bounce in growth as we progress to the back
half of '17," said Patrick Palfrey, senior equity strategist at
RBC Capital Markets.
Caterpillar Inc stood out in the space, with its
stock jumping sharply after its results, though United
Technologies Corp, Cummins and 3M Co
also beat expectations.
"What we're picking up is the industrial economy is better,"
said Tobias Levkovich, Citigroup's chief U.S. equity strategist.
"Traditional industrial companies are saying things like energy
is better, transportation is better, Asia is stronger."
Along with aerospace and defense, results from the
construction machinery and heavy trucks space contributed the
most to gains in the industrial sector. Many of those companies
also rallied after the Nov. 8 election, fueled by optimism over
potential increased defense and infrastructure spending under
President Donald Trump.
However, Jason Ware, chief investment officer at Albion
Financial in Utah, said the divergence of actual results versus
those beating investor projections likely meant that "analyst
estimates were just far too low for industrials going into the
quarter" and did not signify particular economic "strength" in
Ware pointed to materials, technology, energy and financials
as driving the quarter's profit growth.
Tech companies are beating analysts' expectations by 84
percent. Reports from Alphabet, Microsoft and
Amazon.com last week impressed analysts and fueled
confidence in the sector.
Still, the earnings are counter to some U.S. economic
reports. Data last week showed the economy grew at its weakest
pace in three years in the first quarter. At the same time,
overseas economies have been improving and the dollar's strength
Albion's Ware said that given the "coordinated global
economic bounce that we’ve seen" firms with international
exposure may see a tailwind in the first quarter and potentially
for all of 2017.
Profit growth for S&P 500 companies with overseas revenues
of more than 50 percent is at about 21.3 percent, outpacing the
overall S&P 500's forecast, Thomson Reuters data showed.
Estimates vary on the percentage of S&P sales that come from
overseas, but S&P-Dow Jones Indices puts it at less than half.
"The non-U.S. economies seem to be doing better than the
U.S. economy. That's been an important part of the story," said
Michael Purves, chief global strategist at Weeden & Co.
(Reporting by Caroline Valetkevitch and Megan Davies; Editing
by Bernard Orr)