With nearly all companies in the S&P 500 Index (SPX) reporting first quarter profits, aggregate earnings for companies in the index are trending towards a 13.6% gain versus the same period in 2016, according to data from FactSet cited by the Wall Street Journal. This would be the biggest year-over-year profit increase since the third quarter of 2011, the Journal adds, and is a driving factor in the S&P 500’s year-to-date gain of 7.6% through Thursday’s open.
Among the encouraging signs for investors are two things. The first is the large number of companies announcing high-quality earnings: these are profits fueled by strong fundamental revenue and unit sales growth as opposed to short-term earnings oilers such as stock buybacks and accelerating or delaying key writeoffs or charges to make a specific quarter look good – or less bad. The second positive sign is the broad-based nature of the profit surge. While financial and technology companies are among those showing the greatest earnings improvements, 10 of the 11 S&P 500 industry sectors nonetheless are poised to show gains, per the same FactSet data cited by the Journal. Moreover, an upward trend in profits is underway. S&P 500 profits now have improved in three consecutive quarters, and analysts are projecting another 6.8% year-over-year earnings increase for the second quarter, while forecasting that the full year will clock in with an 11% improvement versus 2016, also according to FactSet and the Journal.
Broad-Based Profit Gains
As evidence of how diversified the profit gains are by industry, among the companies mentioned by the Journal for noteworthy performance are social networking leader Facebook Inc. (FB), multinational petroleum exploration, refining and marketing colossus Exxon Mobil Corp. (XOM), heavy construction equipment manufacturer Caterpillar Inc. (CAT) and financial giant Bank of America Corp. (BAC), the corporate parent of Merrill Lynch. The year-to-date changes in these companies’ stock prices through Thursday’s open are, respectively, +30.7%, -7.1%, +14.6% and +6.3%.
Facebook recorded $3.06 billion in first quarter profits, up a breathtaking 76% from the same period in 2016, the Journal says. The company’s user base is growing, and advertising dollars are flooding in as a result. (For more, see also: Why Mega Tech Stocks Will Win Longterm.)
Caterpillar’s first quarter revenues and earnings “smashed Wall Street’s expectations,” according to CNBC. Earnings per share (EPS) came in at $1.28, 106% above the consensus estimate of $0.62, and revenue was $9.822 billion, 5.9% better than the estimate of $9.271 billion, per Thomson Reuters data cited by CNBC. The company finally saw an uptick in demand as an economic recovery progresses around the globe, while also benefiting from cost cutting, Forbes reports.
Bank of America enjoyed a 40% profit boost year-over-year. Key factors were increases in securities trading revenues and net interest income, the result of rising interest rates, as the Journal explains in another article.
Low Hurdle to Surpass
Exxon Mobil reported its best quarterly results since 2015, and more than doubled its profits versus the first quarter of 2016, when crude oil prices sank to their lowest level in over a decade, as another Journal story details. However, though crude oil prices are up versus a year ago, they have slipped so far this year, pulling the shares of Exxon Mobil and other energy companies downward.
Meanwhile, energy is among those sectors that posted impressive earnings gains year-over-year precisely because the year-ago period was so bad, the Journal cautions. Benchmark West Texas Intermediate (WTI) crude bottomed out at $29.42 per barrel on January 15, 2016, recovered to $53.72 by December 30, 2016, but opened Thursday at $51.25, down 4.6% for the year-to-date, per Bloomberg Markets data. (For more, see also: Why Oil Prices Could Double to $90.)