Earnings Reflation – The Bulls Are Running!

When it comes to corporate bond management we can get bulled up about higher revenues and earnings. It is always easier for companies to make interest and principal payments when earnings are going up! And when earnings are higher it can certainly help bond spreads tighten, as we have seen over the last few quarters. As the first quarter earnings season comes to a close it appears we chalked up another strong result with much higher revenues and earnings for investment grade bond issuers, as represented by the S&P 500. With most all companies having now reported, 1Q17 saw revenues increase by 8.7%, while earnings increased by 15.5% compared to the same time last year. The leaders included energy and financials, and only telecommunications came in with negative revenue trends. The great results from this last quarter were not just a one-time event but have been building over the last few quarters.

So why are we seeing such strong growth, and will it continue?  This earnings reflation can be attributed to several events. In early-2016 we saw oil hit a bottom at around $25 a barrel, and growth off this low base has been impressive. About the same time, China increased stimulus to its economy, which also helped a number of sectors. Finally, we can give the Federal Reserve and other central bankers some credit for many years of aggressive monetary accommodation. If you keep the punch bowl out on the table long enough the party should eventually pick up! 

S&P 500 Revenues and Earnings: Recent Trends and Projections

Though the party is still ongoing, we may need to find a few new catalysts if we want the positive revenue and earnings trends to continue. New catalysts could include a boost from better earnings and GDP growth in Europe and around the world, as well as the potential for regulatory relief and tax reform in the United States. We shall see. It is hard to extrapolate such a strong trend into the future, but bullish equity analysts are doing their best!

Source: Bloomberg, Financial Times, Barclays