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What You Need To Know as We Race Toward Q1 Earnings Season

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March 29, 2017
The Race Toward Q1 Earnings Season
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Fasten your seat belt; first-quarter 2017 earnings season unofficially starts during the week of April 10.

The stock market has been on somewhat of a tear in recent months, hitting a series of new-all-time highs in recent weeks. Optimism that the new administration’s proposals might speed up economic growth and boost earnings prospects ahead have boosted stocks, though this optimism may have faded in recent days with last week’s postponement of a key campaign initiative—a replacement to the Affordable Care Act. But earnings are still forecast to grow at a healthy clip in the first quarter. Here's what you need to know.

For the first quarter, CFRA consensus estimates point to a 10.3% year-on-year gain in operating earnings. Seven sectors are projected to see year-over-year increases, led by double-digit gains for financials, information technology and materials, says Sam Stovall, chief investment strategist at CFRA.

There are some weak links in the chain and year-on-year earnings per share (EPS) declines are expected to be reported by the consumer discretionary, industrials, telecom services and utilities sectors, Stovall notes. Stovall offers this snapshot of key projections.

Stretched Valuations?

What else do investors need to know now? Positive earnings growth is expected, but valuation levels are stretched. The S&P 500 is trading at a price/earnings (P/E) ratio 19.5 times trailing 12-month operating EPS, which is a 13% premium since 1988, Stovall notes.

JJ Kinahan, chief market strategist at TD Ameritrade says: "The 'E' needs to start catching up to the 'P.'"

"Stocks are expensive, even if we get 10.3% earnings growth," Stovall adds. "The S&P 500 is still trading at elevated valuation levels, as the benefits from an anticipated cut in taxes, the reduction of the penalty for foreign tax repatriation or increased infrastructure spending are not yet finding their way into 2017 or 2018 EPS growth estimates," Stovall says.

Instead, earnings growth forecasts have been coming down. Now, 2017 growth is forecast at 10.4% versus the initial estimate for 11.2% growth, Stovall says. "Since prices lead fundamentals, the fundamentals better start picking up the pace in order to justify such extended valuations."

Rising Dollar Could Have an Impact

The U.S. dollar index is 3% higher in the first quarter 2017, versus first quarter 2016, Stovall notes. A rising dollar makes U.S. goods and services sold abroad more expensive to foreign buyers and can dampen interest in products offered by U.S. multinationals.

"There is a big concern with the stronger dollar that multinationals may have a tough time meeting those expectations," Kinahan says. "Investors can listen in on earnings calls, or read the transcripts to get a clear picture on the guidance these companies are offering going forward," Kinahan says.

Listen To Earnings Calls

Listening to the earnings calls can "give you a picture of the goals of the firm," Kinahan explains and can help inform your trading time horizon. "If you are long-term player, do you believe the plans the CEO is discussing are achievable? If he has a 2-year plan, perhaps that means you could have a 2-year time horizon" for that trade, Kinahan says. Of course, past performance is not a guarantee of future performance.

Study past Earnings History

TD Ameritrade clients can utilize the Earnings Analysis tool in the Analyze tab in the thinkorswim® platform, as shown in figure 1. “Monitor these so you know what is expected and can review how stocks have reacted to prior earnings announcements,” Kinahan says.

"Pay attention to how Q1 actuals compare with Q1 estimates," Stovall adds. 

Example Earnings Analysis Tool

FIGURE 1: EARNINGS ANALYSIS.

View an 8-quarter earnings and revenue history, including actual versus estimates from third-party Wall St. analysts. for any stock in the database, in the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Tread Carefully

There is the potential for earnings announcements to trigger big moves in stock prices, both higher and lower depending on how the results compare to expectations. "If you are somebody who is not engaged with a stock on a regular basis, be careful about jumping in to just trade earnings," Kinahan says.

 "Use earnings growth as a trend confirmer rather than a signal that you should begin engaging in short-term trading," Stovall concludes. 

Take Your Research to a New Level

The new Earnings Analysis* tab on the thinkorswim® platform gives you earnings history, consensus estimates*, volatility and more in a single-snapshot view.