After a large number of companies beat earnings growth expectations and upped guidance in the fourth quarter, many project earnings strength to continue this year. In fact, we recently upgraded our S&P 500 Index earnings expectations to $152.50 from $147.50 as a result of accelerating U.S. and global economic growth prospects that we expect to boost companies’ bottom lines.
At an earnings per share of $152.50, this comes out to a mid-teen growth rate in 2018, similar to what we saw last year. “The bottom line is that strong earnings are a great sign for equity returns. In fact, the past 12 times the S&P 500 grew earnings by 10% or more, the index finished the full year higher every time. Considering that we are looking for growth in the mid-teens this year, 2018 could once again have equity bulls smiling when all is said and done,” Ryan Detrick, Senior Market Strategist explained.
However, it is important to note that although there has historically been a strong correlation between solid earnings and equity returns,there are always outliers. For instance, in 1991, earnings were down 14% and the S&P 500 gained more than 30%. Then in 2011 earnings were up nearly 16% but the S&P 500 only managed a 2% gain. Still, strong earnings combined with fiscal policy, deregulation, improving confidence, and a steady global economy all suggest that this bull market may make it to the 10-year mark next year.
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Past performance is no guarantee of future results.
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The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
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