By Akane Otani
Earnings at U.S. companies grew at the fastest pace in nearly
six years in the first quarter, the latest boon to a bull market
that has stretched into its ninth year.
With nearly all companies in the S&P 500 having reported
results, aggregate earnings for the first quarter are on track to
grow 13.6% from the year-earlier period, according to FactSet, the
highest growth since the third quarter of 2011. The gains were
broad, ranging from heavy-equipment maker Caterpillar Inc. to
social network Facebook Inc. to regional bank U.S. Bancorp.
Beyond the jump in growth, many investors have been encouraged
by signs that the quality of the results is improving. That
contrasts with recent years, when investors worried that corporate
share buybacks and ultralow interest rates were juicing stock gains
in the absence of business improvement.
Fresh signs of corporate strength, alongside solid U.S. economic
data and relative calm in financial markets this year, have helped
send the S&P 500 up 7.4% through Wednesday.
"We should have continued growth in the markets, a lot of it
driven because we have a stable economy and solid corporate
earnings," said Omar Aguilar, chief investment officer at Charles
Schwab Investment Management. "That gives me reason to be more
optimistic."
Sales are picking up after many companies had turned to reducing
costs and delaying investments in infrastructure to boost profits
through the recovery from the financial crisis. Revenues are
expected to grow by 7.7% from the year-earlier period, according to
FactSet, the highest rate since the fourth quarter of 2011.
Sixty-four percent of companies beat analysts' expectations for
revenue for the latest quarter, according to analysis from FactSet,
above the five-year average of 53%.
Companies also are spending less to repurchase their own shares
this year, easing some investors' concerns that buybacks have been
pumping up earnings growth. Share repurchases among firms are
tracking 18% lower than a year ago and 1.4% lower than the fourth
quarter of 2016, according to S&P Dow Jones Indices data as of
Wednesday.
Buybacks push up per-share earnings, which can make the shares
that remain on the market more valuable. But they also have been
criticized by investors who see them as a way for companies to prop
up share prices in the short term at the expense of focusing on
investments that drive longer-term growth.
Ten of the 11 sectors in the S&P 500 are on track to post
quarterly earnings growth in the first quarter, with financial and
technology companies reporting among the biggest improvements,
according to FactSet.
Bank of America Corp.'s first-quarter profit jumped 40% from a
year earlier, surpassing analysts' expectations, as trading revenue
jumped and rising interest rates boosted its net-interest income --
a key measure of lending profitability. Shares of the bank are up
5.7% in 2017.
Facebook's first-quarter profit surged 76% to $3.06 billion, as
advertisers spent more money on its platforms and the company's
number of active users continued to rise. Its shares have jumped
30% this year.
"When we look at how earnings came in this quarter and how
they're expected to come in the rest of the year, people's concerns
about the stock market should really be allayed," said Jonathan
Golub, chief equity strategist at RBC Capital Markets.
S&P 500 companies have now posted earnings growth for three
straight quarters, after five consecutive quarters of declines,
according to FactSet. The rebound is expected to continue. Analysts
polled by FactSet estimate the broad index will post earnings
growth of 6.8% for the second quarter and 11% for the full
year.
Much of that is because a prolonged slump in commodities prices
eased at the end of last year. About a third of the S&P 500's
earnings growth in the first quarter came from energy companies,
according to FactSet, where results improved alongside oil prices,
which sank to their lowest levels in more than a decade in early
2016.
Last month, Exxon Mobil Corp. reported its best quarterly
results since 2015, more than doubling its profit from the first
three months of 2016, while Chevron Corp. posted a first-quarter
profit of $2.7 billion, compared with a loss of $725 million in the
year-earlier period.
However, shares of both companies are down this year as sliding
oil prices have pressured energy stocks anew, highlighting the
fragility of the recovery. In addition, this year's earnings gains
reflected in part weak performances for many sectors in the
year-earlier period.
Also, some worry that this year's stock rally could stumble if
economic measures -- including U.S. auto sales -- that disappointed
in the first few months of the year show continued weakness.
"I see some danger signs for growth moving forward," said Ed
Keon, managing director and portfolio manager with QMA, a
multiasset manager owned by Prudential Financial, who added that he
has pulled back from U.S. stocks this year while shifting more
money into their European counterparts.
Still, Mr. Keon said he doesn't see an end to the bull market
soon. The most recent earnings season was "clearly exceptional,"
Mr. Keon said, and should help stocks keep climbing in the near
term.
--Ben Eisen contributed to this article.
Write to Akane Otani at akane.otani@wsj.com
(END) Dow Jones Newswires
May 24, 2017 16:43 ET (20:43 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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