It probably received less attention than it normally does, but the US first-quarter earnings season is off to a good start. Only 20% of companies in the S&P500 have reported so far, but 85% of those have surprised positively on net income and 72% on sales. For both it is the strongest beat rate in years and, especially in sales, a strong improvement from the past two years when only half of the companies managed to beat sales expectations. Up to March net revisions of analysts’ expectations had been negative, setting a low bar for surprises. But even with this in mind, growth of more than 10% in earnings per share in the first quarter, based on the numbers released so far and expectations for companies that have yet to report, would be the strongest pace since the third quarter of 2010.
Our earnings outlook does not differ materially from the consensus, which stands at 10.6% for the next twelve months. If anything, we expect somewhat slower earnings growth. Our problem with US equities lies more in valuations. We think that in a modest growth scenario, the current price-earnings ratio of 17.5 is quite high. Alternative scenarios with higher inflation or protectionist measures would justify somewhat lower P/E ratios in our view. Only when growth accelerates without much inflation should we see valuations gain further.
Exhibit 1: S&P 500 surprise index (% of companies suprising positively with regard to sales and net income in their quarterly reports) for the period from 2006 through 21/04/17
Source: Datastream, BNP Paribas Asset Management as of 24 April 2017
Written on 24 April 2017