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Tracking Wall Street’s Q1 earnings optimism

David Aurelio
David Aurelio
Senior Research Analyst

The Q1 earnings season is in full flow, with Wall Street predicting the strongest growth in seven years. Charts from Lipper Alpha Insight show the uplift to these forecasts following President Trump’s tax reforms.

  1. Tax reforms and robust global growth mean Wall Street is forecasting a 18.4 percent rise in first quarter earnings in the S&P 500.
  2. Optimism is in contrast to the usual trend for analysts to become more bearish and make downward revisions to earnings estimates.
  3. Homebuilder Lennar Corporation highlights upbeat trend with figures beating consensus estimates on top and bottom line.

Helped by tax reforms and continued robust global growth, Wall Street displayed a marked upturn in confidence going into the current round of quarterly results in the Q1 earnings calendar.

The forecasts picked up significantly in the early part of 2018 to reveal a projected increase of 18.4 percent in year-over-year (YoY) earnings for the S&P 500, a level which would be the strongest in seven years. Revenues, which don’t reflect the impact of tax cuts, are expected to grow 7.3 percent.

The favorable trends are forecast to last throughout 2018, with analysts now estimating earnings growth of 19.7 percent across the year.

S&P 500 YoY earnings growth rates
S&P 500 YoY earnings growth rates. Source: I/B/E/S

Bucking the bearish trend

The current optimism is in contrast to the usual pre-results behavior on Wall Street, when analysts typically become more bearish and make downward revisions to earnings estimates as the results come into view.

As a result of this, the expected YoY earnings growth rate declines an average of four percentage points from the start of the quarter to the start of earnings season.

This quarter, largely driven by expected benefits of tax reform, analysts have increased their growth expectations by 6.2 percentage points to 18.4 percent from 12.2 percent on Jan. 1, 2018.

The signs are that companies will manage to meet these expectations. Among the first 23 S&P 500 companies to report 18Q1 earnings, 73.9 percent beat forecasts.

This is above the long-term average of 64 percent, and a sign that the elevated earnings estimates set by analysts are not too high a bar for companies to meet.

Get the April 24th S&P Earnings Dashboard from Lipper Alpha Insight

Earnings round-up on Lipper Alpha Insight
Earnings round-up on Lipper Alpha Insight

Home building optimism

A strong economy and housing market helped home builder Lennar Corporation (LEN.N) beat consensus estimates on both the top and bottom line.

Revenues came in at US$3 billion, up 28 percent YoY, while earnings of $1.11 per share were up 594 percent from the prior year.

Stuart A Miller quote

During the earnings conference call, Executive Chairman Stuart Miller said: “The housing market has been strong and it is continuing to strengthen.

“There is a general sense of optimism in the market as jobs have been created, the labor participation rate is increasing and wages are higher.

The low unemployment rate and the labor shortage are driving wage growth, which on the one hand has added to our construction cost, but on the other hand, has expanded our customer base.”

Miller continued: “Customers in our Welcome Home Centers confirmed that they feel confident as the economic conditions have remained strong, stable and improving.”

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