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Q1 Earnings Season to Show Growth Acceleration

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It is too early to start talking about the 2018 Q1 earnings season, as we are almost a month away from the big banks kicking-off the latest reporting cycle. That’s when everyone in the market will start paying attention to the Q1 earnings season. Unfortunately for us, we don’t have the luxury to wait that long as we are responsible for maintaining the ‘books’ on every earnings season.

While we haven’t (officially) closed the books on the 2017 Q4 earnings season yet (we have results from 499 S&P 500 members at this stage), the 2018 Q1 earnings season has actually gotten underway already. Including Adobe’s (ADBE - Free Report) better than expected fiscal February-quarter top- and bottom-line results, we now have Q1 results from three S&P 500 members – AutoZone (AZO - Free Report) and Costco (COST - Free Report) are the other two that have already reported fiscal February-quarter results.

The bulk of 2018 Q1 results will be comprised of companies coming out with fiscal March-quarter results. But as we all know, fiscal and calendar quarters don’t match for all companies, as is the case with Adobe, AutoZone and Costco whose fiscal quarters ended in February. We club such fiscal February-quarter results as part of our March-quarter tally. It is in this context that the 2018 Q1 earnings season has gotten underway for us already. We have another 10 S&P 500 members with fiscal quarters ending in February on deck to report such 2018 Q1 results this week, which includes a number of industry leaders like FedEx (FDX - Free Report) , Oracle (ORCL - Free Report) , Nike (NKE - Free Report) and others.

The fact is that by the time the big banks come around to report March-quarter results (Alcoa thankfully no longer has this honor), we will have seen Q1 results from almost two dozen S&P 500 members. The chart below shows the weekly calendar of the Q1 earnings season.

Expectations for 2018 Q1

The strong momentum we saw in the preceding earnings season is expected to continue this reporting cycle as well, with total earnings for the S&P 500 index expected to be up +15.5% from the same period last year on +7.2% higher revenues. This would follow the +13.5% earnings growth on +8.5% revenue growth in the 2017 Q4 earnings season, the best quarterly performance in more than 6 years.

There were two aspects of the preceding earning season that really stood out and put that reporting cycle in a category of its own. It will be interesting to see to what extent we see a repeat performance on those two counts in the 2018 Q1 earnings season.

These two standout features of the 2017 Q4 earnings season were the very strong momentum on the revenue front and impressive turnaround on the estimate revisions front.

The revenue momentum likely reflected a combination of the synchronized global growth environment and a favorable foreign exchange backdrop. With both of those factors still very much in play in Q1 as well, we can reasonably expect to see the revenue momentum trend continue this earnings season as well.

The story about trends in 2018 Q1 estimate revisions is better told by the chart below.

What this chart shows is that earnings growth expectations for 2018 Q1 moved up significantly since mid-December 2017. This represented a major trend shift relative to what we have been seeing over the last many years when estimates would actually be moving in the opposite direction. To be fair, the revisions trend had stabilized in the preceding quarters as well, with estimates for 2017 Q4 essentially remaining unchanged in the three months ahead of the start of that reporting cycle.

A big driver of these positive revisions is obviously the direct impact of the tax cuts, but that isn’t the only reason, as you can see in the revisions trend for revenues in the chart below.

We will be keeping a close eye on how estimates for 2018 Q2 evolve as companies report Q1 results and share their outlook for Q2 and beyond. Estimates for Q2 went up as well, as they did for the following quarters, when the same was happening to 2018 Q1 estimates. As of today, total Q2 earnings for the S&P 500 index are expected to be up +17.8% from the same period the year before on +7% higher revenues.

The chart below shows 2018 Q1 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to accelerate in Q2 and continue in the following quarters.

As you can imagine, expectations for full-year 2018 are for an impressive showing, with total earnings for the S&P 500 index expected to be up by +21% from the year-earlier level on +6.8% higher revenues. If achieved, this will be the highest annual growth pace for the index since 2010.

The table below shows the summary picture for 2018 Q1, contrasted with what was actually achieved in the preceding period.

Standout Sectors

As you can see, the Energy sector remains a big growth contributor in Q1, with total earnings for the sector expected to be up +65.7% from the year-earlier period on +15.4% higher revenues. But growth for the quarter would still be in double-digits even on an ex-Energy basis (last row in the table above).

What is driving the strong Q1 growth isn’t the Energy sector, but rather the breadth of growth across all sectors, with double-digit earnings growth for 10 out of the 16 Zacks sectors, including Technology and Finance.
For the Technology sector, total Q1 earnings are expected to be up +19.5% on +11.4% higher revenues, which would follow the sector’s impressive +24.2% earnings growth on +11.5% higher revenue growth.

The Finance sector, which sat out the preceding quarter with an essentially flat showing, total Q1 earnings are expected to be up +18.7% from the same period last year on +4% higher revenues.

Driving the Finance sector’s strong growth in Q1 and beyond is the combined effect of tax cuts, higher interest rates and an improved domestic growth environment. Finance sector’s earnings were only up +1% in full-year 2017 and in low single digits in the three years prior to that, but are on expected to be up an impressive +25.3% in full-year 2018.

The Technology sector, on the other hand, has already been on stronger ground, with full-year 2017 earnings for the sector up +10.7% and expected to be up +22.4% in 2018. The enterprise spending environment was expected to improve this year even before the tax cuts, with the tax windfall expected to give a much needed boost to those trends. On top of these we have the existing secular trends in cloud computing, artificial intelligence and big data that are expected to remain growth areas in the space.

Please note that Technology and Finance aren’t just any two sectors out of the 16 in the S&P 500 index; these two sectors combined are the twin pillars of index’s total profitability, bringing in more than 40% of the index’s total earnings this year. The Energy sector’s outlook has improved, but the sector simply lacks the heft of these two. The Energy sector is expected to bring in about 5% of the index’s total earnings this year.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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Here is a list of the 76 companies including 10 S&P 500 and reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
FIBROCELL SCIENFCSC-0.23-0.3317.07%MondayBTO
LEJU HOLDINGSLEJU-0.19-0.1910.53%MondayBTO
MEDIWOUND LTDMDWD-0.16-0.0915.79%MondayBTO
ORACLE CORPORCL0.660.630.00%MondayAMC
ATYR PHARMA INCLIFE-0.43-0.5315.69%MondayAMC
ATENTO SAATTO0.250.194.35%MondayAMC
AFFIMED THERAPAFMD-0.17-0.170.00%TuesdayBTO
FEDEX CORPFDX3.062.3510.80%TuesdayAMC
DXP ENTERPRISESDXPE0.110.42-27.27%TuesdayAMC
AAR CORPAIR0.50.38-5.41%TuesdayAMC
NOVABAY PHARMACNBY-0.05-0.13-77.78%TuesdayAMC
UQM TECH INCUQM-0.02-0.0333.33%TuesdayAMC
LAUREATE EDUCATLAUR0.310.33-49.18%TuesdayAMC
STEELCASE INCSCS0.160.220.00%TuesdayAMC
GENL MILLSGIS0.80.720.00%WednesdayBTO
PQ GROUP HLDGSPQG0.12N/A37.50%WednesdayBTO
LIQTECH INTLLIQTN/A-0.19-50.00%WednesdayBTO
FIVE STAR QLTYFVEN/A-0.12-25.00%WednesdayBTO
ON TRACK INNOVOTIV-0.01-0.0350.00%WednesdayBTO
TECOGEN INCTGEN00100.00%WednesdayBTO
ACTUANT CORPATU0.140.115.56%WednesdayBTO
GUESS INCGES0.530.419.09%WednesdayAMC
FIVE BELOW INCFIVE1.160.938.46%WednesdayAMC
WIDEPOINT CORPWYY0-0.03100.00%WednesdayAMC
WHEATON PRC MTLWPM0.160.190.00%WednesdayAMC
SITO MOBILE LTDSITO-0.04-0.07-140.00%WednesdayAMC
HERMAN MILLERMLHR0.490.39-3.39%WednesdayAMC
QAD INC-AQADA-0.110.0675.00%WednesdayAMC
DARDEN RESTRNTDRI1.641.324.29%ThursdayBTO
ACCENTURE PLCACN1.491.337.83%ThursdayBTO
CARNIVAL CORPCCL0.430.3826.00%ThursdayBTO
CONAGRA BRANDSCAG0.550.485.77%ThursdayBTO
NOMAD FOODS LTDNOMD0.310.1426.09%ThursdayBTO
MICHAELS COSMIK1.210.962.33%ThursdayBTO
G-III APPARELGIII0.16-0.168.44%ThursdayBTO
COMMERCIAL METLCMC0.260.2557.89%ThursdayBTO
CPI AEROSTRUCTRCVU0.230.2411.76%ThursdayBTO
FUSION TELECOMFSNN-0.12-0.26-50.00%ThursdayBTO
NEOGEN CORPNEOG0.240.226.92%ThursdayBTO
JINKOSOLAR HLDGJKS0.230.66-76.47%ThursdayBTO
LANDS END INCLE0.440.41106.67%ThursdayBTO
CINTAS CORPCTAS1.241.113.97%ThursdayAMC
MICRON TECHMU2.690.7713.68%ThursdayAMC
NIKE INC-BNKE0.520.6817.95%ThursdayAMC
JAGGED PEAK EGYJAG0.090.020.00%ThursdayAMC
AT HOME GRP INCHOME0.350.2625.00%ThursdayAMC
KB HOMEKBH0.30.159.09%ThursdayAMC
ASV HOLDINGSASV0.07N/A-16.67%ThursdayAMC
CAREDX INCCDNA-0.16-0.1510.53%ThursdayAMC
INTELLICHECK MOIDN-0.07-0.10.00%ThursdayAMC
CALADRIUS BIOSCCLBS-0.83-0.7351.28%ThursdayAMC
HTG MOLECULR DGHTGM-0.23-0.766.12%ThursdayAMC