Earnings for S&P 500 companies are expected to grow by 9.1% in the first quarter of 2017, compared to the first quarter of 2016. This would mark the highest growth since the fourth quarter of 2011.
Also, it marks the third straight quarter of year-over-year gains after a five-quarter earnings recession that ended in mid-2016.
Here are the main reasons why that is the case.
1. Revenue increases
A major factor in these forecasts is a 7.1% expected increase in revenues over the same period. Since the financial crisis, many companies have relied on cost cutting instead of sales growth to boost earnings.
In the past, delays in infrastructure spending and historically low interest rates have helped companies expand margins while sales remained stagnant. Therefore, if revenues grow by 7.1% this quarter, it would mark the biggest jump in more than 5 years.
Source: The Wall Street Journal
2. Oil prices
Rebounding oil prices are also a significant factor in expected profits. After petroleum exporting countries decided to cut oil output at the end of 2016, prices have increased by about 15%, which greatly benefits energy companies. In fact, energy companies are expected to be the biggest contributors to first quarter earnings growth, totaling US$7.6 billion and accounting for more than 30% of the S&P’s gains. For the whole year, energy companies are expected to grow earnings by a whopping 306%!
3. Growth stocks
Technology sector earnings are expected to outperform the S&P, due to strong performance from giants Facebook, Google and Apple, but also because of the semiconductor sector, which should benefit from increased demand for chips and better pricing.
The expectations for the technology sector also highlight the fact that growth stocks have over-performed in the first quarter relative to value stocks.
Led by gains from Bank of America and Goldman Sachs, financial companies should have one of the highest earnings boost this quarter. For the whole year, higher interest rates and less regulation should contribute to higher earnings than the S&P.
It’s important to note that even if the S&P missed a five-month winning streak with a 0.04% decline in March, a strong earnings season, as expected, should reduce fears of overvaluation. In fact, April tends to be the best month for the S&P in the first half of the year, showing positive returns about 75% of the time, according to LPL Research.
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The information contained in this article is General in nature and has been prepared without taking into account your objectives, financial situation and needs.