Anything-But-Soft Earnings Data Starting to Smack of Rally Years

(Bloomberg) -- Could this be the restoration of the profit growth that drove the bull market’s fattest years? Signs from the first quarter point to yes.

Among the spate of bullish trends visible after three weeks of earnings reports: analysts, who almost always cut full-year estimates in April, are now raising them, pushing forecasts for S&P 500 operating income above 11 percent. While guaranteeing nothing, U.S. stocks have returned almost twice as much in years when income rises by double-digit percentages.

For the first quarter itself, estimates are surpassing projections at a rate not seen since the biggest years of the Obama bull market.

Anything-But-Soft Earnings Data Starting to Smack of Rally Years

While warnings over equity valuations get louder, profit momentum is gathering pace. Riding on a synchronized recovery in the global economy, S&P 500 companies look a little likelier to pull off double-digit growth for the first time since 2013, when the index jumped 30 percent. As President Donald Trump pledges tax cuts and easier regulations, corporate income is poised to get another boost.

“Every month, there is someone that says, ‘The sky is falling,”’ said Erick Ormsby, chief executive officer of Alcosta Capital Management in San Ramon, California. “But earnings are everything to the market, and there is more upside.”

Almost 200 S&P 500 companies are scheduled to release results over the next two weeks as the reporting season continues apace. Below are some highlights on where U.S. firms stand this cycle.  

1. Positive Surprises

Since earnings season began around April 11, 79 percent of companies have exceeded profit estimates and 66 percent beat on sales, data compiled by Bloomberg show.

While positive surprises on the top line were not as widespread as the bottom line, collectively the beat margin on sales in on course for the best reading in at least two years. That’s good news in particular when profit margins are showing signs of peaking.

Anything-But-Soft Earnings Data Starting to Smack of Rally Years

Chief executives continued to strike an optimistic tone on earnings calls, extending a revival in sentiment in place since Trump’s election. Mentions of the word “better” relative to “worse” or “weaker” have reached levels last seen in late 2010, according to Bank of America Corp. data.

At the same time, analysts are breaking away from a four-year tradition of turning sour despite better-than-expected first-quarter earnings. Instead of lowering full-year estimates, they’ve raised them.

“If guidance this earnings season continues to improve, this could help solidify/restore confidence in the growth rebound,” strategists led by Savita Subramanian wrote in an April 24 note.

Anything-But-Soft Earnings Data Starting to Smack of Rally Years

2. Sector Breakdown

Commodity producers and consumer-discretionary companies have posted the biggest earnings surprises among 11 S&P 500 industries while real estate investment trusts and phone-services provided lagged behind.

Going by their first-day reaction, materials and health-care shares performed the best, rising at least 0.9 percent on average. Interestingly, energy ranked at the bottom despite a huge beat, as crude prices slipped back to below $50 a barrel.

Anything-But-Soft Earnings Data Starting to Smack of Rally Years

3. Growth Trend

The January-March period marks a third straight quarter of growth after S&P 500 companies suffered a 15-month profit decline, the longest since the global financial crisis. Analysts expect the annual pace of 10 percent growth to be sustained through 2019.

Should that come true, the eight-year equity rally may have a chance to rival the 1990-2000 bull run as the longest on record. Since 1988, there have been 13 times when S&P 500’s annual earning growth topped 10 percent and in all but two instances, stocks ended the year higher. On average, the benchmark index rose 12 percent, data compiled by S&P Dow Jones Indices and Bloomberg show.

Anything-But-Soft Earnings Data Starting to Smack of Rally Years