The first quarter of 2018’s earnings season is approaching and expectations are high. Year-over-year (YoY) earnings for the S&P 500 are expected to be the strongest in seven years and increase 18.4%, while revenue is expected to grow 7.3%. Overall earnings are expected to benefit from global growth and tax reform, which are expected to remain drivers throughout 2018. As a result, full year earnings are expected to grow 19.7% in 2018.
Exhibit 1: S&P 500 YoY Earnings Growth Rates
Analysts typically become more bearish and make downward revisions to earnings estimates ahead of earnings season. As a result, the expected YoY earnings growth rate declines an average of four percentage points from the start of the quarter to the start of earnings season. This quarter, largely driven by expected benefits of tax reform, analysts have increased their growth expectations by 6.2 percentage points to 18.4% from 12.2% on Jan. 1, 2018.
Exhibit 2: S&P 500 18Q1 YoY Expected Growth History
With earnings expectations high, investors will closely watch to see if S&P 500 companies are able to meet the anticipated results. As of Apr. 6, 23 S&P 500 companies have reported 18Q1 earnings. Of these, 73.9% beat earnings expectations. This is above the long-term average of 64% and a bullish sign that the elevated earnings estimates set by analysts are not too high of a bar for companies to meet.
A strong economy and housing market helped home builder Lennar Corporation (LEN.N) beat consensus estimates on both the top and bottom line. Revenue came in at $2,980.8M, up 27.5% YoY. Earnings of $1.11 per share were up 593.8% from the prior year.
During the earnings conference call, Stuart A. Miller, Lennar Corporation – CEO & Director, stated, “The housing market has been strong and it is continuing to strengthen. There is a general sense of optimism in the market as jobs have been created, the labor participation rate is increasing and wages are higher. The low unemployment rate and the labor shortage are driving wage growth, which on the one hand has added to our construction cost, but on the other hand, has expanded our customer base.”
Mr. Miller went on to say, “Customers in our Welcome Home Centers confirmed that they feel confident as the economic conditions have remained strong, stable and improving. The deficit in the production of new homes that has existed since the market crash has created a supply shortage that matches up with both strengthening demand and a millennial population that has begun to form households and have children. Supply short with strong demand is propelling this recovery forward, and the math would indicate that it will still take some years to get to equilibrium.”
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