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Market Update: 11-20-17

HIGHLIGHTS FROM ANOTHER STRONG EARNINGS SEASON

John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial

Corporate America delivered another outstanding earnings season. S&P 500 Index earnings are tracking to an 8.2% year-over-year increase for the third quarter with just a handful of companies left to report. Excluding the impact of hurricanes within the insurance group, corporate America produced its third straight quarter of double-digit earnings growth. The amount of upside to earnings estimates was slightly below average in the quarter, but we consider the season a success given the strong upside to revenue forecasts, along with generally upbeat outlooks from corporate management teams. The consistency with which companies have beaten estimates is particularly impressive, even when considering the historical pattern of consensus estimate reductions that give companies a lower bar. Earnings have beaten consensus estimates for 34 consecutive quarters, covering much of the current economic expansion (based on Thomson data).

SEASON HIGHLIGHTS

Here we share three highlights from the third quarter earnings season. 1. Revenue upside. S&P 500 revenue rose a solid 5.4% year-over-year in the third quarter. Perhaps more impressively, the index produced a revenue upside surprise of 1.3% compared with estimates as of September 30, 2017, one of the best performances of recent years [Figure 1]. The revenue beat rate of 67% has only been topped once since 2011 and that was last quarter (Q2 2017) at 69%. The correlation between revenue and nominal gross domestic product (GDP) — or GDP including inflation — clearly helped during the quarter as the pace of nominal economic growth has picked up from under 3% in 2016 to about 4% over the past three quarters...

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