Will the Earnings Season Support the Rally in Stocks in 2017?

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The 2017 earnings season is already underway as U.S. companies start to report their earnings for the previous quarter. The next week is particularly significant in the 2017 earnings calendar as we expect earnings reports from more than 100 of the biggest American firms.

Some of the biggest market movers such as Facebook and Apple Inc. (AAPL) are also to report their earnings next week. Facebook Inc (FB) will be the biggest driver of earnings growth in the tech sector while Apple’s cautious guidance could provide the biggest drag to the tech sector. This piece seeks to explore how well the earnings season could support the ongoing rally in stocks.

Here’s what we know so far about earnings

U.S. firms have started reporting earnings and the earnings reported so far suggests that equities have started recording earnings. To start with, Boeing Co (BA), one of the market-movers in the Dow beat earnings forecasts when it posted earnings of $2.59 per share on revenue of $23.29B. Analysts had forecasted earnings of $2.35. Microsoft Corporation (MSFT), another market mover posted adjusted earnings of $0.83 per share on adjusted revenue of $25.3B.

About one-third of firms in the S&P 500 have reported their earnings so far; hence, we can start to make broad inferences about the earnings season. For instance, FactSet posits that Q4 2016 earnings are set to increase by 4.2% above the earnings from Q4 2015. More so, the 4.2% growth in earnings outperforms the 3.2% increase that analysts had forecasted at the end of 2016.

Earnings are supporting the rally in stocks but valuations are still a big concern for investors. Going forward,  stakeholders in the U.S. economic front think that traders must take proactive measures to protect their portfolios while trading market cycles.  Bernard Arnault, CEO and founder of luxury-goods maker LVMH Moët Hennessy Louis Vuitton notes that “For every 10 years, we have eight good years and two not good years,” he observes that the U.S. economy has already enjoyed eight good nears that “we really have to be prudent” going forward.

Here’s why earnings are important

U.S. stocks are enjoying an impressive bullish rally that contrasts sharply with the analysts’ forecasts about a potential market crash after Trump’s surprise victory. The chart below shows how U.S. stocks have fared since Trump won the U.S. presidential elections.

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As you can see from the chart, the S&P 500 is up 7.87%, the Dow Jones Industrial has crossed the seemingly elusive 20,000 milestone and it currently boasts a 10.03% gain, the NASDAQ Composite is up a decent 10.05%. The gains in stocks are particularly interesting because many Wall Street commentators had submitted that stocks would crash if Trump won the election.

Interestingly, many analysts are still convinced that the gains in stock market lack fundamental footing and that stocks will eventually give back some of those gains. Hence, the earnings season is next milestone that could determine if stocks will continue to book gains or if equities will retreat from their recent highs. In essence, investors will be interested in seeing earnings growth—earnings growth will encourage them to buy more stock and we can expect gains in stocks to continue. In contrast, if U.S firms fail to report decent earnings, investors might not be optimistic about buying stocks going forward – a reduction in the number of investors buying shares could cause share prices to fall.

 

Jacob Maslow is our Editor, and has extensive experience with writing about global financial matters. He also runs a successful SEO consulting business, Mekomi Marketing