Wednesday, March 28, 2018

Bullish Earnings Ahead

Spring started on March 20. Spring is Goldilocks’ favorite season because it is neither too cold nor too hot. Chauncey Gardiner, antihero of Jerzy Kosinski’s satirical novel Being There, also likes spring because that’s when his flowers and plants start to blossom and grow. In the movie version (“Being There,” 1979), Chauncey, played by Peter Sellers, is mistaken for an insightful economist with a penchant for gardening metaphors instead of the literally speaking gardener that he is. When asked by the President of the United States whether the government can stimulate economic growth with temporary incentives, Chauncey replies: “As long as the roots are not severed, all is well. And all will be well in the garden.” He explains that “growth has its seasons.” And “Yes, there will be growth in the spring!”

The President responds: “Hm. Well, Mr. Gardiner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time. I admire your good, solid sense. That’s precisely what we lack on Capitol Hill.”

I presume that President Donald Trump is getting more informed economic advice than provided by Chauncey. He should be doing so now that my friend Larry Kudlow is in charge of the National Economic Council. Larry interviewed me about my book on Saturday, March 18:

“Welcome back folks, I’m Larry Kudlow, pleasure to be back with you. Old friend of mine, one of Wall Street’s absolute top number-one economic and investment strategy forecasters—he’s got a new book out—I’m talking about Dr. Ed Yardeni, president now of Yardeni Research (that’s, previously economist with Federal Reserve Bank of NY and the US Treasury. I want to say that Ed Yardeni and I were—I don’t know what we were—friendly rivals, but mostly friends. Down through the years—the 1980s, 1990s—there were three names at the top of the list of Institutional Investor’s All Star Team, going back. One was Ed Hyman, the other was Ed Yardeni, and the other one was a wacko named “Larry Kudlow,” so you are going to get some great stuff here. Ed has a new book, called Predicting the Markets: A Professional Autobiography.”

I mentioned that I remain bullish on the stock market because the outlook is bullish for earnings. Previously, in the 3/14 Morning Briefing, I wrote:

“The Q4-2017 earnings season is over. Industry analysts received quite a bit of guidance on the positive impact of the corporate tax rate cut at the end of last year on earnings this year. There will be more to come during the Q1-2018 earnings season in April, which will provide more specific numbers showing how much the Tax Cut and Jobs Act (TCJA) boosted earnings during that quarter, and is likely to boost earnings over the rest of the year.

“In other words, I suspect that neither the analysts nor investors have fully discounted the big windfall the TCJA will provide to corporate bottom lines. That’s because corporate managements probably weren’t sure themselves about the full impact of the TCJA during their conference calls in January, which obviously focused on last year’s final results. So while many of them were giddy about the coming earnings boost in their calls with analysts and investors, they might actually have toned down their giddiness!” Let’s review the latest relevant data:

(1) Revenues for S&P 500/400/600. Industry analysts are expecting S&P 500 revenues to grow 6.8% this year and 4.6% next year. They are expecting S&P 400 revenues to grow 6.1% this year and 4.1% next year. For the S&P 600, they are predicting 6.5% in 2018 and 4.5% in 2019.

Forward revenues, the time-weighted average of consensus estimates for this year and next year, continue to move up in record-high territory for the S&P 500/400/600. On a y/y basis, forward revenues for the S&P 500/400/600 are up 8.0%, 11.9%, and 14.5% through the week of March 15.

(2) Revenues for S&P 500 sectors. Since the start of the data in 2006, forward revenues are at record highs for the following S&P 500 sectors: Consumer Discretionary (up 7.0% y/y), Consumer Staples (9.9%), Financials (8.8%), Health Care (7.4%), Industrials (8.5%), Information Technology (15.5%), Materials (11.3%), and Real Estate (2.7%).

(3) Net Revenues Revisions Indexes. March data are now available for our Net Revenues Revisions Indexes (NRRIs) for the S&P 500 and its 11 sectors over the past three months. NRRIs are positive for all sectors with the exception of Real Estate and Utilities. Here is the performance derby for the NRRIs: Industrials (22.5%), Materials (20.5), Financials (16.4), Health Care (16.2), Information Technology (16.1), Energy (16.1), S&P 500 (14.7), Consumer Discretionary (14.1), Consumer Staples (12.9), Telecommunication Services (3.6), Real Estate (-2.7), and Utilities (-13.1). At 14.4 during March, the S&P 500’s NRRI is at a record high, slightly exceeding the previous record high during May 2004.

(4) S&P 500 earnings. We will soon find out whether Q1-2018 earnings turned out to be even better than industry analysts expected after receiving guidance last quarterly earnings season on the positive impact of the TCJA on earnings this year. They certainly raised their 2018 earnings-per-share estimates sharply during the 14 weeks after the TCJA was enacted on December 22 through the week of March 22 for the S&P 500/400/600 by $11.58 (7.9%), $7.41 (7.2%), and $5.43 (11.6%). They now expect 2018 earnings for these three composites to grow 19.6%, 19.6%, and 23.6%.

(5) S&P 500 buybacks. S&P 500 buybacks data are now available through Q4-2017. I like to combine buybacks with dividends paid by the S&P 500 as a measure of corporate cash flow that is getting ploughed back into the stock market. I realize that not all dividends are reinvested in the stock market, but lots are reinvested, particularly by institutional investors.

The sum of buybacks and dividends last year was $938 billion. The four-quarter moving sum of this series has been hovering around $900 billion since 2014. Buybacks totaled $548 billion last year, continuing to hover around $500 billion since 2014. Dividends rose to another record high of $436 billion.

I expect that buybacks and dividends will continue to be bullish for the stock market. Both could get a lift from significant repatriated earnings from abroad resulting from the TCJA.

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