FactSet, a financial research firm, found in a recent poll that analysts expect 2016 fourth-quarter earnings by S&P 500 corporations to grow 3.2% year over year.
Third-quarter earnings rose 3.1% year over year. That was the first gain since the first quarter of 2015.
FactSet expects 2017 to be much better with gains of at least 9% or more. FactSet says that for the third and fourth quarters, earnings will rise 14% year over year.
This will stem from increasing optimism about economic growth and, especially for the financial sector, rising interest rates that will result in a positive yield curve.
The analysts seem to connect this increase in corporate earnings to optimism over the incoming Donald Trump administration's new economic policies.
What will be the source of the growth? The financial sector.
The S&P 500 financials sector increased 20% in 2016 and led to nearly half the total earnings growth for the S&P 500 in the third quarter, according to FactSet.
This growth resulted primarily from the trading activity of commercial banks. Banks expect such gains to continue.
According to a Wall Street Journal story, "Executives at Citigroup, Bank of America and JPMorgan said at a banking conference in early December that they expect key fourth-quarter trading metrics to grow by double-digit percentages from a year earlier."
Earnings at utilities are expected to grow significantly in the fourth quarter of 2016 year over year. That earnings performance will continue into 2017.
Technology, consumer staples and health care are also expected to do well.
What about Basic Materials and Industrials that have recently been leading the surge in stock market prices?
FactSet does not mention basic materials, and the group says that industrials "are expected to report an earnings decline by more than 8% in the fourth quarter.
Still, optimism seems to reign as the Trump administration nears.
At the same time, there are a few clouds. Consider:
- Productivity and overall economic growth remain a concern. That is, although the third quarter's gross domestic product (GDP) posted its strongest quarterly growth in two years, GDP rose only 1.7% year over year. Moreover, the year-over-year growth in 2017 is only expected to be in the 2% to 2.5% range.
- The dollar is expected to remain strong in 2017. Many analysts are expecting that sometime during the year, a euro will be worth only $1. Less than a decade ago, the euro was worth more than $1.50. The dollar is expected to rise against most other currencies, especially the Japanese yen and the British pound. Roughly one-third of S&P 500 revenue comes from outside the U.S. A strong dollar can hurt this income.
- The European Union looks more unsettled than perhaps at any point in its history. Italy and Greece are experiencing severe economic problems. There are elections in Germany, France and the Netherlands this year with volatile, populist factions finding large, receptive audiences. In addition, the mechanics of Brexit look increasingly troublesome.
- The world's economic, social and political environment has become increasingly uncertain. China, Russia, the Middle East, the Ukraine and Venezuela all face severe difficulties.
- Stock market valuations are high. The 12-month trailing price/earnings ratio of the S&P 500 is somewhere close to 21. The 10-year average for this measure is just under 16. The cyclically adjusted price earnings ratio of 2013 economics Nobel Laureate Robert Shiller is over 28. Its historical mean is around 18. Corporate earnings must increase to support stock prices' current levels.
The latest earnings season begins Thursday. Stay tuned!