U.S. corporate earnings have come in largely ahead of analysts' forecasts in the first two weeks of the reporting season, according to data from Refinitiv, but the rate at which companies are beating estimates continues to slip below both near and longer-term averages, suggesting the fading impact of tax cuts, and concerns about slowing global growth, could dampen profits over the first half of the year.
Around 20% of S&P 500
Collectively, fourth quarter earnings growth for the S&P 500 is likely to top 14.3%, Refinitiv suggests, although that rate is expected to slow to just 2% for the first quarter of this year, or $324.8 billion, before rebounding modestly to 4.5% for the three months ending in June.
"With earnings growth estimated at around 10%, that would mean reasonable gains this year," said Brad McMillan, chief investment officer for Commonwealth Financial Network. "If confidence rose and valuations picked up, the market could appreciate even more."
"If, on the other hand, confidence faltered and valuations dropped below the recent history, which is certainly possible, the effect could overwhelm rising earnings and take the market down instead," McMilan noted. "This is why confidence matters for investors."
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"For Q4 2018, there have been 73 negative EPS pre-announcements issued by S&P 500 corporations compared to 49 positive, which results in an N/P ratio of 1.5 for the index," Refinitiv noted. "The forward four-quarter (19Q1 - 19Q4) P/E ratio for the S&P 500 is 15.5."
Fourth quarter revenue growth, which many investors see as a better gauge of both corporate and broader economic health, is pegged at 5.6%, with around 58% of reporting companies topping the consensus forecast, a figure that sits marginally below the long-term average of 60%.