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Don’t miss our next trade idea. Get on the Bear Traps Report Today, click hereQ1 Earnings Season
We’re already through the first quarter of 2017, can you believe it? More importantly, how high in the bar for earnings seasons?
S&P 500 Earnings Expectations from Wall St.
2018 Street Consensus: $148.10
2017 Street Consensus: $131.45
2016 Operating Earnings: $106.45
2016 GAAP, Real Earnings: $95.35
The Road Ahead
Tax reform legislation climbs a far different mountain than the health bill. In December, we recommended clients overweight U.S. Treasuries, Utilities and Consumer Staples with a focus on “the high probability of political fumbles in Washington.”
Wall St. is Heavily Bought in to Tax Reform’s Success
We noted in December in our Bear Traps Reports, the difficulty congressional Republicans have had in reaching consensus on the health legislation can very easily lead to a pullback from their lofty ambitions on tax reform. Bottom line: the more extreme reform ingredients of the House Republican plan on tax reform are more at risk today. Hot topics like the border adjustment and interest expense provisions that make up the destination based cash flow tax (DBCFT), will have far more uphill battle passing in an environment where near-unanimous support in the Senate will be necessary.
Expectations from Wall St., Numbers You Need to Know
Tax Reform = S&P Earnings Boost Corp*
Earnings Premium: New Corporate Tax Bracket vs Earnings Addition to S&P 500 from Tax Reform
32% v 0% (earnings boost)
30% v +3.5% (earnings boost)
25% v +6.5% (earnings boost)
20% v +9.5% (earnings boost)
15% v +12.5% (earnings boost)
Bear Traps Report Data
*This is on top of the Street’s assumed 14% earnings growth based on economic, stock buy back and dividend payout forecasts.
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2017: $142*
2016: $116**
*Street’s forecast including successful tax reform
**Actual latest year (trailing four quarters to December 2016) GAAP earnings was $95.35, latest year “operating” earnings (removes “unusual” items) was $106.45 per Bear Traps and Bloomberg.
S&P 500 Twelve Month Forward Earnings Per Share Estimate
2017: $134.50
2016: $126.75
2015: $129.90
2014: $131.20
The forward 12-month P/E ratio for the S&P 500 is 17.5. This P/E ratio is based on Wednesday’s closing price (2348.45) and forward 12-month EPS estimate ($134.50). Of the 111 companies that have issued EPS guidance for the first quarter of 2017, 79 have issued negative EPS guidance and 32 have issued positive EPS guidance.- Factset
As you can see, there’s 200-250 S&P handles tied to tax reform’s MEANINGFUL success. Without the “expected” earning growth from tax reform, the current 18 PE on the S&P is far higher, well above 20 in our view.
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Best Case with Full Fiscal Policy Option: 2810*
Base Case with Partial Fiscal Policy Option: 2510
Worst Case with No Fiscal Policy Execution: 2090**
S&P 500 Today: 2343
We went through 12 different research reports from Wall St’s analysts, these are their best and worst case fiscal policy scenarios.
**Assumes no fiscal policy action (tax reform, repatriation, infrastructure) and a reversion to the mean in near record high CEO, small business and consumer confidence.
*Assumes full fiscal policy execution over the next 12 months (tax reform, repatriation, infrastructure, deregulation).
S&P 500 Sales Growth
2012-2016: 1.9%
2003-2007: 7.5%
1995-1999: 7.2%
Factset, Barclays
On the positive side, you can see why markets are so pumped up on Trump. Sales growth found while looking at S&P 500 companies only grew at 1.9% during the mature years of the Obama economic recovery. This data is well below normal levels and speaks to substantial upside if “animal spirits” are fully embraced in the years to come.
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