S&P 500 Companies
Two groups of stocks:
1. Those having reported Q4 2017 earnings: Large upward revisions to consensus EPS estimates for 2018.
2. Those not yet reported Q4 2017 earnings: Slight upward revisions to consensus EPS estimates for 2018 since mid-November.
As we projected in our Q4 Earnings Preview dated January 11, Q4 2017 earnings season has started off strong. Through January 23, 51 companies in the S&P 500 have reported. As expected, 2018 EPS revisions have been very strong. Before earnings season began, analysts were predicting only 10% earnings growth for the full S&P 500 for 2018. After reporting began, 2018 EPS growth estimates have risen to 23% for the 51 companies that have reported. While this is a small sample, we expect this pronounced improvement to continue for U.S. public companies as we move through the Q4 2017 earnings season. The median upward revision for companies not yet reported is only 2% over the past
60 days.
Besides company-specific factors, we believe strong U.S. and global economies are driving some of the improvement in 2018 EPS estimates. We believe another significant factor in these revisions is the lower 2018 corporate tax rate that U.S. companies will face due to the recently passed U.S. tax legislation. Bloomberg estimates that the median effective U.S. tax rate for the S&P 500 in 2017 was 26%, which is close to 2016’s median rate of 27% for companies yet to report Q4 results. This rate is expected to fall below 21% in 2018 due to the new tax laws. As a result, and as mentioned in our piece on Corporate Tax Reform dated December 6, 2017, we believe that S&P 500 2018 earnings estimates will still be
revised meaningfully higher.
Upward 2018 EPS revisions translate into lower projected 2018 P/E ratios than currently estimated. In fact, the 51 companies in the S&P 500 that have reported currently carry a median 2018 P/E of 14x on their revised earnings estimates.
