Key Drivers of Fourth Quarter Earnings Growth

Fourth quarter earnings season is in full swing and expectations remain high for U.S. companies. We discussed some of the reasons behind those expectations last week, and today we will take a look at the sectors that are driving earnings growth.

Once again, the energy sector is expected to see the strongest year-over-year earnings growth. But it’s important to keep in mind that earnings for the group were weak in the fourth quarter of 2016. In fact, starting in the fourth quarter of 2014, earnings fell for nine straight quarters (according to Bloomberg data) before turning positive in the first quarter of 2017. Despite the recent surge in growth, earnings for the group remain well below mid-2014 levels.

Materials earnings historically have a high correlation to the energy sector, so it is no surprise that the sector is expected to see strong earnings growth in the fourth quarter as well. However, its contribution to the overall growth rate of the index will be small as it represents just 3% of the index. Technology, on the other hand, is the largest sector in the S&P 500 Index; and continued strength in the underlying semiconductor industry should help the sector provide a meaningful boost to the broad index in the fourth quarter.

John Lynch, Chief Investment Strategist summed up the strong earnings season as follows, “Given historical beat rates in the 3–4% range, year-over-year earnings growth for the fourth quarter of 2017 could end up as high as 14–16%. This is a positive sign for investors, as earnings tend to be a key driver of stock market performance.” We will discuss this topic in more detail in this week’s Weekly Market Commentary, due out later today.

 

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