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Is This the Best Earnings Season of This Century?

Tracey Ryniec
Updated

  • (0:15) - Earnings Just Keep Getting Better

  • (3:45) - S&P 500: Earnings vs. Revenue 

  • (7:50) - Tax Reform Impact on Earnings Reports

  • (12:15) - Outlook for 2018 Q1 Earnings 

  • (16:00) - S&P 600 Earnings 

  • (22:30) - What Could Go Wrong?

  • (26:00) - Episode Roundup: Podcast@Zacks.com

Welcome to Episode #117 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

In this episode, Tracey is joined by Sheraz Mian, Zacks Director of Research, to discuss the fourth quarter 2017 earnings season and what 2018 is expected to look like.

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The third quarter earnings season was a solid one so expectations were already running high heading into the fourth quarter earnings season. But no one had any idea it would be THIS hot.

Earnings and Revenue Growth Jumping

How hot is it?

With 31% of the S&P 500 reporting so far:

1.      Earnings up 12.7%

2.      Revenue up 8.3%

3.      81.5% beating EPS estimates

4.      78.3% beating revenue estimates

To put it into perspective, the four-quarter average for earnings growth is 8.9%. The four-quarter average for revenue growth is just 4.4%.

On earnings beats, the four-quarter average is 74% and the four-quarter average for revenue beats is just 62.6%.

Revenue Gains Are Impressive

Many argue that earnings beats aren’t that hard to do as management can manipulate the numbers by lowering guidance etc.

But revenue growth and beats are a much harder metric to mess around with. You either have the revenue growth or you don’t.

Technology is now about 25% of the S&P 500 and its revenue growth is already up 9.4% in the fourth quarter with more companies yet to report. The sector did 8.8% in the third quarter as it builds momentum.

Will the S&P 600 Follow?

Only 16% of the S&P 600 small caps have reported earnings but bullish trends are developing there as well.

Revenue growth has soared, rising 10.9%, compared to a four-quarter average of a decline of 0.6%.

Earnings are expected to rise 11.8% for the fourth quarter of 2017 and another 22.3% in the first quarter of 2018.

Finance, not tech, dominates the S&P 600. It’s about 21% of the total market cap. But finance is expected to see 44% earnings growth.

How Can You Invest in This Hot Earnings Season?

There’s always the option to buy the underlying indexes.

For the S&P 500:

1.      The SPDR S&P 500 ETF (SPY)

2.      The iShares Core S&P 500 ETF (IVV)

3.      The Vanguard S&P 500 ETF (VOO) are low cost options.

For the S&P 600 Small Caps:

1.      The iShares Core S&P Small-Cap ETF (IJR)

2.      The SPDR S&P 600 Small-Cap ETF (SLY)

3.      The Vanguard S&P Small-Cap 600 ETF (VIOO)

The iShares ETF has an expense ratio of just 0.07% while you’ll pay 0.15% for the SPDR.

If you want a wider range of small caps, investors can buy the Russell 2000 which holds 2000 stocks instead of 600.

Two possibilities are the Vanguard Russell 2000 ETF (VTWO) and the iShares Russell 2000 ETF (IWM).

Are There Risks in 2018?

The earnings and revenue data look great. It’s easy to be bullish right now.

But Sheraz warns that there could be storms ahead, including rising wages which would hit payrolls, and hence earnings, harder than expected.

What else could happen to burst the earnings boom?

And looking ahead, what should investors expect for the first quarter of 2018 earnings season?

Find out on this week’s podcast.

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SPDR-SP 500 TR (SPY): ETF Research Reports
 
ISHARS-SP SC600 (IJR): ETF Research Reports
 
SALOMON LEASING (SLY): ETF Research Reports
 
VANGD-SP5 ETF (VOO): ETF Research Reports
 
ISHARS-SP500 (IVV): ETF Research Reports
 
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