It's earnings time, and once again we wonder whether overall earnings have peaked and will decline or even go negative in the next quarter or two.
The short answer is no, and that's the main reason the stock market remains up.
Earnings are trending up. After essentially moving sideways in 2016 (the main reason the stock market got off to such a rocky start last year), earnings resumed a healthy uptrend in 2017. Earnings for the as a whole are expected to increase 11 percent in 2017 over 2016, and are expected to be up another 11 percent in 2018.
As most of you know, analysts tend to overshoot future earnings predictions, but even taking a normal range into account, the 2018 numbers look healthy.
Through much of 2015 and going into 2016, earnings were flat to down. But we have, for the most part, returned to double-digit growth.
Peak earnings? Not yet
Q117: +15.3 percent
Q217: +12.3 percent
Q317 (est) +4.9 percent
Q417 (est) +12.3 percent
Q118 (est) +10.7 percent
Source: Thomson Reuters
Why is Q3 only seeing a 4.9 percent estimated increase? Growth is healthy in most sectors, but in the last month we have seen a notable decline in profit for financials.
Q3 S&P 500: the earnings movers
Energy up 139 percent
Tech up 12.2 percent
Materials up 10.8 percent
Health Care up 8.2 percent
Industrials up 1.8 percent
Financials down 7.7 percent
Source: Thomson Reuters
Three major hurricanes have been the main culprit. "This quarter has come down because of the impact of the storms, which has greatly reduced insurance company profitability," David Aurelio, who watches corporate earnings for Thomson Reuters, told me.
Insurance companies likely will see a 50 percent decline in earnings; even a diversified financial firm like Berkshire Hathaway could see a 19 percent decline.
Exclude those two groups, and S&P profit for the third quarter rises 7.2 percent, not 4.6 percent.
Energy, which cratered when oil dropped below $50 earlier this year, is expected to rebound now that oil has come back above that price. And energy will continue to be strong, though the percentage gain will be smaller because earnings started to recover a bit a year ago. The effects of the hurricanes will diminish, so financials will see healthy gains.
The key to this story is the strong, steady growth in technology, which has been a huge contributor the gains all year. Semiconductors, for example, are expected to report earnings growth of 27 percent in the third quarter.
Q4 earnings expectations (estimates)
Energy up 93.7 percent
Financials up 15.7 percent
Materials up 24.0 percent
Technology up 12.3 percent
Industrials up 11.7 percent
Source: Thomson Reuters
Another reason earnings are holding: The global reflation trade is real as earnings are improving in Europe as well. The STOXX 600, a proxy for the largest companies in Europe, is expected to increase 5.4 percent in Q3 and 16.5 percent in Q4.
"That's very important, given how big U.S. multinationals have become very dependent on overseas earnings," Aurelio told me.
None of the analysts has incorporated any assumptions about tax cuts into their estimates. Sure, traders are expecting some kind of corporate tax cut to materialize, and there is (I believe) some kind of premium in the market expecting that to happen, but it is not incorporated into the actual earnings assumptions.
For Nick Raich at the Earnings Scout, the biggest risk is central banks turning hawkish. "If the ECB, the Bank of England, and the Bank of Japan suddenly join the Federal Reserve in becoming more hawkish all at once, what will that mean for the recovery? We still haven't been able to answer the question, how much has central bank stimulus meant for earnings overall?"
If you're looking for a reason to be bearish on stocks, earnings are not the place to look, at least not yet.
WATCH: Big banks set to report Q3 results
