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Earnings are up and revenue growth is back, but rate hikes could derail momentum

  • It's turning into an extraordinary quarter, with earnings up nearly 14 percent from a year earlier, and they keep rising.
  • Far more companies are beating estimates, and they are doing so at a much wider margin than average.
  • But rate hikes could spoil the party after January's strong gains in wage growth.
Corporate New York skyline
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Half of the S&P will have reported by the end of the day Friday, and it is turning into an extraordinary quarter. Earnings are up nearly 14 percent from last year ago, and they keep rising, according to Thomson Reuters.

That is a blended estimate and includes companies that have not reported yet. Counting just the companies that have already reported, earnings are up 15.3 percent.

Far more companies are beating estimates (nearly 80 percent) than the average (64 percent), and they are beating by a wider margin.

Most importantly, revenue growth has returned. The earnings gains are no longer coming primarily from cost cutting. Revenue growth is at 7.7 percent, near the highest in years. In addition, 82 percent of companies are beating the revenue estimates (also far higher than the 60 percent average). As they have done with earnings, companies are beating the estimates by a wider margin, 6.1 percent. That is also about twice the average of 3.1 percent.

The "reflation trade," or the bet on an expanding global economy, can be seen in the estimates for cyclical companies. There is notable growth in estimates for materials, 31.6 percent, energy, 139.6 percent, and industrials, 6.8 percent. Excluding GE, industrials would see growth of 15.9 percent.

First-quarter earnings estimates have also been rising.

Q1 Earnings estimates

Oct. 1: up 10.6 percent

Jan. 1: up 12.2 percent

Feb. 2: up 14 percent

Of course, these numbers will eventually level off, but what is remarkable is analysts are expecting double-digit earnings growth in the next four quarters across the board: in the S&P Small Cap 600, the S&P Midcap 400 and the S&P 500.

What could derail this gravy train? Friday's jobs report, which indicates that wages have grown 2.9 percent year over year, the strongest since 2009. While that is good news for American workers, it is causing agita for traders.

The market has not been freaked out about higher interest rates, but beginning in mid-January, the velocity of change in rates began to accelerate. We went from 2.5 percent in the 10-year Treasury yield to 2.8 percent in about three weeks, and that is a bit too fast for traders. They are being forced to adjust their thinking about the number of possible Fed rate hikes this year from three to possibly four.

"This wage number will be looked upon as supporting those looking for four hikes this year," independent bond analyst Adrian Miller told me.