Earnings Not Sole Driver Of Stock ETFs Rally

October 23, 2017

The stock market may be rip-roaring higher, but earnings aren't keeping pace. That's according to a new report from FactSet indicating corporate profit growth hit a road bump during the latest quarter. Yet equity ETFs are soaring.

Aggregate earnings for S&P 500 companies may only increase by 2.1% in Q3, the slowest rate of the year. That follows growth of 13.9% in Q1 and 10.3% in Q2.

The third-quarter figure is an estimate and may be revised higher if companies beat analyst expectations, as they usually do. The third-quarter earnings reporting season began in earnest last Thursday and will continue for the next several weeks.

Hurricane Factor

The biggest culprit for the earnings slowdown may be hurricanes, which more than a dozen firms have already blamed for hurting profits. The second-most-cited excuse was foreign exchange rates, says FactSet.

As in any quarter, profit growth during Q3 isn't expected to be even across sectors. Energy may see the fastest growth at nearly 114% thanks to a rebound in oil, natural gas and refining markets from depressed levels.

That's followed by the technology sector, with growth of 8.8%, a number boosted by strong performance in semiconductor companies in general and Micron Technology in particular. Next is retail, with forecasted growth of 6.3%; materials with 2.8%; industrials with 2.2%; health care with 2.2%; and consumer staples with 1.6%.

On the flip side, the biggest earnings losers during Q3 are the financial and the consumer discretionary sectors, with expected declines of 11.4% and 2.9%, respectively. Utilities and telecom are expected to see earnings declines of 2.6% and 1.4%, respectively.


Source: FactSet


Q4 Earnings Rebound

At first glance, it's hard to reconcile the tepid earnings growth of Q3 with this year’s sizzling stock market rally. The S&P 500 has returned 16% year-to-date, with all-time highs reached on a near daily-basis in October.

But a closer look at the FactSet data reveals Q3's slowdown is more of a temporary setback than the start of a more bearish trend.

As it stands now, analysts expect that, in the fourth quarter, earnings will reaccelerate to double-digit levels, with earnings growth of 11.1% expected for the S&P 500 as a whole. Moreover, if analysts are correct, each of the 11 sectors may register growth in Q4.


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