Investors look to global growth for earnings power

NEW YORK: America First may be a main policy of the White House and fuel to the stock market rally but US investors are looking overseas for stronger earnings as S&P 500 companies are set to report their first quarter of double-digit profit gains since 2014.
A strong earnings season would help justify pricey stock valuations, with the S&P 500 rallying this month to its most expensive since 2004 on a forward price-to-earnings basis.
While the US economy has gotten a lot of attention since the November 8 election and President Donald Trump’s vows to boost the domestic economy, data during the quarter has suggested the global economy is strengthening.
That is welcome news for S&P components, since nearly half of their sales come from overseas.
Shares of the biggest US companies, which tend to have the most overseas exposure, have been among the strongest performers over the past several weeks.
For instance, the S&P 500 has outperformed its average stock this year since mid-February, after performing mostly in line at the beginning of the year.
“The fact that we’re seeing stabilization in the global community will bode well for multinational companies and help earnings for the first quarter,” said Terry Sandven, senior equity strategist at US Bank Wealth Management in Minneapolis.
“You’ve also seen the dollar not appreciate as much as many had forecast a quarter ago, so multinational companies may get some relief on the (foreign exchange) line,” he said.
A weaker dollar boosts offshore revenues when they are translated into the US currency.
The US dollar index was down 1.8 per cent in the first quarter, but it was still cheaper during last year’s first quarter.
A survey this week showed euro zone business activity at a six-year high.
Forecasts from the International Monetary Fund show a pickup in the global economy in 2017 and 2018, especially in developing economies.
However, some investors worry multinationals may have already priced in big gains in earnings.
“As long as nothing changes, these firms are going to be fine,” said Jack Ablin, Chief Investment Officer at BMO Private Bank in Chicago, speaking of the strength of the largest American companies.
He warned, however, that stock prices may have taken in any good news. “The market has certainly fully discounted all that.”
The US earnings season gets under way next week, with results from banks JPMorgan Chase, Wells Fargo and Citigroup among others.
The financial sector is projected to post a 15.4 per cent profit gain, second only to energy among S&P sectors.
Energy companies, which carried most of the losses that extended an S&P 500 earnings recession until the second quarter of last year, are expected to do most of the heavy lifting this earnings season with a whopping 600 per cent increase.
For the entire S&P 500, analysts are projecting earnings up 10.1 per cent compared with a year ago, which would be the first double-digit increase since the third quarter of 2014, according to Thomson Reuters data.
Excluding the energy sector, S&P 500 earnings are expected to be up 6.1 per cent.
Revenue is expected to have jumped 7 per cent, the most since 2011, which should help compensate for higher wage and other costs facing companies, strategists said.
“We’re seeing revenues contribute materially more to that bottom line growth,” said Patrick Palfrey, Senior Equity Strategist at RBC Capital Markets in New York.
Big profit gains are expected in technology and materials as well, the data showed.
“It comes down to a synchronized global economic acceleration…; a rebound and stabilization in commodity prices and a higher interest rate environment,” Palfrey said.
US STOCKS: The Dow Jones Industrial Average on Friday was down 6.85 points, or 0.03 per cent, at 20,656.1, the S&P 500 lost 1.95 points, or 0.08 per cent, to 2,355.54 and the Nasdaq Composite dropped 1.14 points, or 0.02 per cent, to 5,877.81.
All three indexes ended slightly lower for the week. Six of the S&P’s 11 major sectors ended down on the day.
US employers added about 98,000 jobs in March, the fewest since last May and well below economists’ expectation of 180,000, as bad weather hit construction hiring.
However, wage growth edged up and unemployment fell.
New York Fed President William Dudley on Friday shed more light on the US central bank’s developing plan for when to stop replacing bonds that expire in its portfolio, how to execute it, and how far it would ultimately shrink its balance sheet.
US Treasury yields rose after Dudley’s remarks, which helped push equities lower, according to Paul Zemsky, Chief Investment Officer, Multi-Asset Strategies and Solutions, at Voya Investment Management in New York.
LibertyView’s Meckler said Dudley’s remarks were not earth-shattering but “small statements are having a magnified affect because investors are worried.”
The United States, in a pre-dawn strike, fired missiles at an airfield from which it said a deadly poison gas attack was launched this week.— Reuters