Earnings Season – Food Fight!

Corporate earnings season is that time of year when we get an update from management on revenues, earnings and the state of the business. The season occurs shortly after the end of every fiscal quarter and runs for a few weeks. Company sponsored earnings calls, press releases and power point presentations are closely followed by securities analysts who look for updates and new ideas. For those in the business it’s a big deal, and a bit of a food fight as analysts all compete to ask the best questions and to lob the cleverest insights. These food fights are important as we need to closely follow portfolio investments. When an investment thesis changes we will respond with a trade.

This quarter the food fight was a healthy one. With 240 companies in the S&P 500 reporting as of writing, this was an exceptional quarter with overall revenue growth of 9.5% and earnings per share (EPS) growth of 25.1%. Banks (the main course for many portfolios) are posting revenue growth of 6.0% and EPS growth of 22.7%. These are really outstanding numbers and everyone seems to be doing well! The numbers have been brought to us by: the Federal Reserve’s recent ultra-loose monetary policy, an exceptionally long U.S. economic expansion, generationally low unemployment, strong global economic growth and earnings which have been supersized by the recent massive tax cut. Add a large side order of buybacks (further boosting EPS) and dessert in the form of low labor costs, which are still quite modest compared to historical averages.

But will the food fight be just as big next quarter? We believe earnings will be good for the remainder of 2018, but should fade thereafter. We may have already seen the high-water mark. A less accommodating Fed, higher interest rates, a stronger dollar, a slowing world economy, a growing list of tariffs, wage pressures and higher energy costs should all help to moderate earnings in the coming quarters.

Sources: Bloomberg, the Wall Street Journal, the Financial Times