Peter Ball, 22 November 2017

The US reporting season is drawing to an end with around 5% of companies left to report. Overall it has been another solid quarter. Of the companies that have reported so far, 68% have exceeded revenue estimates while 77% have exceeded earnings per share estimates.

Earnings growth for the third quarter is currently sitting at 6.9%. This is well ahead of markets expectations of 2.4% at the end of September. Although this represents a slowdown from the strong growth we saw in the first and second quarters (up 14% and 11% respectively), 2017 is on track to producing the strongest earnings growth since 2011. This has been driven by a combination of solid revenue growth and margin expansion. Aside from a general pickup in global economic growth, the depreciation of the US dollar and a recovery in oil prices both provided tailwinds to revenue growth during the quarter.

On a sector basis, Energy and Technology have remained particularly strong. Energy sector earnings more than doubled as oil prices continued to recover through the quarter. North American oil exploration companies have also started to turn their focus to earnings growth and cash flow generation, rather than the pursuit of oil production growth. The Technology sector has remained a particular highlight. An impressive 87% of tech companies beat earnings expectations during the quarter. In aggregate, earnings growth was 11.8% ahead of expectations. This represents the strongest outperformance in decades. The four largest tech stocks which include Apple, Alphabet, Facebook and Microsoft, accounted for over half of this outperformance. The strong results have led to impressive share price performances. The tech sector is up 36.9% year-to-date, making it the best performing US sector by a very wide margin.

The biggest underperformer has been the Financials sector, which reported a 5.4% decline in earnings. While US banks comfortably beat expectations, with earnings growth of 9%, this was more than offset by the insurance sector, which suffered heavy losses from the three major hurricanes in the US and Puerto Rico, as well as an earthquake in Mexico.

The S&P 500 has rallied for the last 12 months making it the second longest rally since World War 2. This is highly unusual because the S&P 500 has historically pulled back by 3-5% on average, every few months. This impressive feat has been very closely tied to the strong financial performance we have seen over the last few reporting seasons. In fact, the market rallied in the first half of this year only during the reporting seasons. Therefore, the big question for investors is whether there is more financial outperformance left to drive markets higher. One area that may provide a further boost is tax reform. The House of Representatives and the Senate are only in the early stages of forming new tax reform proposals, so this will likely be a source of upside in 2018. However, even a simple tax cut would provide a meaningful boost to companies that generate the majority of their revenue in the US.

us reporting season update