FOURTH QUARTER 2016 EARNINGS PREVIEW:
LOOKS LIKE ANOTHER GOOD ONE
Burt White Chief Investment Officer, LPL Financial | Jeffrey Buchbinder, CFA Market Strategist, LPL Financial
Fourth quarter 2016 earnings season gets underway this week (January 9–13), and it looks like it will be another good one. With Alcoa no longer the unofficial kick off of the earnings season, we will consider Friday the start of the season when several big banks with the potential to move the market will report. Here we preview fourth quarter earnings season, which we expect to be another good one, marking the return of earnings growth to the energy sector.
Thomson-tracked consensus estimates for the fourth quarter of 2016 are calling for a 6.1% year-over-year increase in S&P 500 earnings. That means based on the typical upside companies generate, near 4%, double-digit earnings growth may be within the realm of possibility. We have several reasons to be optimistic:
- Resilient estimates. Earnings estimates held up very well during the last three months of 2016. Since October 1, 2016, fourth quarter 2016 earnings estimates for the S&P 500 have fallen 2.2%, about half the five-year average of minus 4.3% and 3% better than the 10-year average of minus 5.3%. Fourth quarter estimates for the two biggest S&P sectors, technology and financials, have actually risen since October 1 and over the past month providing encouraging signs. The S&P 500’s 7% jump since Election Day increases the odds that estimates prove conservative, as stocks do tend to signal earnings moves.
- Improved pre-announcement ratio. The ratio of companies pre-announcing negative fourth quarter 2016 results relative to those pre-announcing positive results, at 2.0, is better than the year-ago quarter (2.9), last quarter (2.3), and the 20-year average (2.7). This ratio suggests a high proportion of companies will exceed estimates, potentially higher than in recent quarters. A solid 71% of S&P 500 companies beat estimates in the third quarter of 2016 with a 4.8% upside surprise.