After almost 2 years of poor earnings performance going into the 2016 elections, the S&P 500 Index earnings per share (EPS) has grown strongly in each of the last 5 reporting periods ending March 1st, 2018. The current reports indicate that nearly 75% of companies beat both earnings and sales estimates, the highest quarter of surprises since this metric was first tracked by FactSet in 2008. The 4th quarter 2017 earnings being reported now are on track to hit their highest growth rate in over 6 years. Thanks to tax cuts, parabolic EPS guidance surge has inspired a January climax in stocks and a flash 12% correction. With persistently strong earning surprises, stocks have resumed their rally the past couple of weeks as the earnings season comes to a close March 1st. We remain long-term positive, but short-term buyers beware that rallies often correct post-earnings announcement periods.
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Since the 2016 Presidential election, stocks have appreciated strongly throughout each earnings season and paused briefly afterward. One year ago stocks rallied relentlessly on good earnings reports in February moving higher in 17 of 20 trading days until earnings season ended March 1st. A modest pullback for a few weeks ensued.
Will 2018 1st quarter earnings action rhyme with the 2017 performance? While the current February rebound was preceded by massive volatility, the gains have been even stronger than last years February surge with a similar pattern of EPS boosted strength. Now that the reporting season is about to end, a corrective pause in March is more likely.
Should stocks pull back in March we would expect the key 1st support zone to encompass the S&P 500 Index 2650 to 2700 area. A further rally back to the recent record highs of late January without a secondary drop into March would be impressive and neutralize further downside expectations. Markets tend to climb a ‘wall of worry’ and thus far the double-digit flash correction has not had time to build up the normal ‘fear factor’ needed to scare cash onto the sidelines. We remain longer-term bullish but feel caution is warranted over the next few weeks.
