Key Takeaways From An Excellent Earnings Season

It has been an outstanding earnings season by many measures. Second quarter numbers were strong, even without the boost from the new tax law. With just a small handful of companies left to report, S&P 500 Index earnings are up about 25% year over year, or 18-19% without the boost from corporate tax cuts. A record 80% of S&P 500 companies exceeded quarterly earnings targets, according to data from Thomson Reuters, while index earnings have now beaten expectations 37 straight quarters.

“Strong revenue growth and strong operating cash flows, in addition to tax cuts, are driving overall profit growth,” noted LPL Chief Investment Strategist John Lynch.

We were particularly impressed by the increase in 12-month forward earnings estimates, highlighted in our LPL Chart of the Day. Remember, estimates typically fall as companies report.

Earnings Estimates Rising Amid Trade/Tariff Concerns

See our latest Weekly Market Commentary for more takeaways from this earnings season, including what we heard from management teams about trade policy and potential opportunities for higher profit margins.

These results more than support our 2018 earnings growth forecasts for the S&P 500 Index of $155 per share, which may prove conservative with the impact of tax cuts still cycling through (consensus estimates from various sources are over $160 per share). Even as the S&P 500 sits near the low end of our year-end target range of 2900-3000, we do not believe this is a time for investors to sell stocks.* We think this bull market—now the longest ever—still has legs, though the ongoing trade dispute with China and midterm elections may be sources of near-term volatility.

 

IMPORTANT DISCLOSURES

* Additional descriptions and disclosures are available in our publication Midyear Outlook 2018: The Plot Thickens.

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The Standard & Poor’s 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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