With 2016 wrapped up, equity investors can breathe a sigh of relief. The stock market is close to record highs thanks in large part to corporate profits, which are on their way up―finally.
For a long time, that wasn't the case. Corporate America was entrenched in an "earnings recession," where profits for the companies in the S&P 500 had declined (on a year-over-year basis) for six-straight quarters, the longest such streak since the financial crisis.
That streak was broken in Q3 of 2016, when earnings finally registered their first year-over-year gain since Q1 of 2015. The increase was modest―3.1%, according to FactSet―but it marks a turning point for profits, which are the lifeblood of the stock market.
In fact, with the increase, earnings for 2016 as a whole may turn out to be positive, but just barely. Corporations will begin to release fourth-quarter and full-year earnings in the middle of this month; current expectations are that S&P 500 companies will report another year-over-year gain for profits in Q4 of 2016, and a year-over-year gain for total 2016 profits.
Real Estate The Big Earnings Winner
For the full year, real estate is expected to be the biggest earnings winner, with an 18.6% increase. Consumer discretionary follows behind, with a 9.6% expected increase, then utilities at 7.5% and health care at 6.4%.
On the flip side, energy is the biggest earnings loser, with a massive 75.3% drop in profits expected, followed by telecom with a 7.5% decrease, materials with a 3.2% drop and industrials with a 3% decline.