Crossing Wall Street Review – August 25, 2017
The Weak Dollar Is Boosting Profits
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (NYSE Arca: CWS)
We don’t have every last number in yet, but we’re very close, and it appears that the S&P 500 had operating earnings of $30.73 for Q2 (that’s the index-adjusted figure). That’s an all-time record. It also represents an increase of 19.6% over last year’s Q2.
This is very good news because there had been growing concerns that the corporate sector was in danger of a slowdown. Instead, this was the fourth quarter in a row of growing earnings. Before that, the S&P 500 went through a nasty earnings recession that lasted seven quarters. What’s important to understand is that earnings are being helped by expanding profit margins. That’s a good sign. For Q2, operating margins topped 10% for the first time since 2014.
The second quarter was also notable because earnings estimates weren’t severely slashed before earnings season. You’ll see that a lot. Estimates will plunge low enough for the results to barely claim an “earnings beat.” Lower the bar far enough so you can step over it. It’s true that earnings estimates almost always start out too high, but the results for Q2 were only 4.7% below the estimate from the beginning of the year. That’s pretty good. Right now, the estimates for Q3 are only 2.7% below where they were at the start of the year. The slashing-estimates game seems to have passed.
So far, 71% of S&P 500 companies have beaten expectations for Q2. Less than 7% of tech stocks missed on earnings. That’s impressive, but the biggest reason for the earnings resurgence is the energy sector. The energy sector went from earning $42.94 per share in 2014 to losing $13.71 in 2015. (Again, these are index-adjusted figures, but in this case, it’s to the S&P 500 Energy Index.) That threw the entire earnings picture for the S&P 500 out of whack. Now energy profits are back, and the overall picture looks much better.
We’re still not quite two-thirds of the way through 2017, but it looks like the S&P 500 is on pace to make about $125 to $130 per share this year. The S&P 500 is going for about 19 times this year’s earnings, and probably about 17 times 2018’s earnings. That’s elevated, but nothing crazy.
What’s happening is that we’ve gone from a period where the strong dollar was distorting corporate earnings. Now the weak dollar is helping the bottom line. It comes down to this: Europe’s economy is trailing by about three years. All of what Mr. Draghi is doing, and has been doing, comes largely from Mr. Bernanke’s playbook.
A few years ago, we were growing, and the Europeans were stuck in a rut. As a result, the dollar rallied, and rates in Europe went negative. Now Europe is much better, so the euro is up and the dollar is down. In fact, Draghi is talking about how he wants to exit all that yucky QE and ZIRP stuff. I don’t blame him. If there’s any big news from Jackson Hole this weekend, it’ll probably be from Mario instead of Janet.
The key takeaway is that the investing environment continues to be favorable for investors.
The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.