Key Points:
- While Q1 2018 GDP is likely to be below Q4 2017’s 2.9% GDP growth, resulting in slower revenue growth than the S&P 500’s +9% median figure from last quarter, we believe EPS growth will be equal to or better than Q4 2017’s +16%.
- Three factors include weak dollar-boosting exports, tax reform, and higher energy production and prices.
- EPS will likely surprise, as it has each quarter for the past six years.
- Energy has by far the best growth estimates after having the best Q4 growth as well. Energy’s median Q1 sales and EPS are expected to grow 14% and 62%, y/y, respectively.
- U.S. crude production hit another record of 10.5Mbd last week. Despite continued supply gains, daily average WTI prices rose 13% in Q1 2018 from Q4 and are already up another 3% in Q2 q/q.
- Other strong expectations include Transports (7% sales, 20% EPS, driven by trucks and rails), Retail (6% sales, 20% EPS, driven by high 2017 tax rates), and Financial (6% sales and 19% EPS, driven by regionals, investment banks/management companies, and payment processors).
- Estimate revisions (versus 90 days ago) also strongly favor Energy. Also strong are Transportation and Retail. Cyclicals/Staples have had no net positive revisions (leisure-travel booking, media, housing, and autos have all seen negative median Q1 EPS revisions).
- S&P 500 GAAP valuation is fairly high on a trailing 12-month basis (24x), but forward non-GAAP is reasonable, at 15x. Expect EPS, not P/E expansion, to drive market gains.
- Most USFL earnings are over the next four weeks.
- Actionable ideas that have reported accelerating sales/EPS growth and sales/EPS beats are OLLI, PVH, SPLK. LULU also meets these criteria but is slightly extended. Energy names CLR and WRD are also actionable with 3-4 weeks left to report.
- Stocks from groups with weak expected growth that overlap with our laggards list include K, KHC, OMC, MET, AIG, GT.
