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Will Q1 earnings fall? The stock market says no.

APR. 24, 2019

Stock investors seem to disagree about a negative outlook for Q1 earnings

[Chart—S&P 500 EPS for next 12 months]

graph of the S&P 500 index earnings per share (EPS) estimates for next 12 months

Over the long term, corporate earnings have been the primary driver of equity market returns. Since 1995, both the S&P 500 Index and S&P 500 company earnings have grown at around a 9% annual rate. Over the past three years, S&P 500 earnings have grown 38%, which justifies the 42% cumulative return of the S&P 500 over this time.

During Q4 of 2018, investors reset their expectations for earnings growth, on concerns about the end of the business cycle, weakening global growth, and the U.S.-China trade war. That explains most of the reason behind the strong decline in stocks at the end of last year.

This year has been different, at least so far; investors have revised their earnings outlook again, as reflected in the uptick in expectations for next-twelve-months earnings growth. (See chart above.) Positive surprises for Q1 earnings are ahead of their three-year average, a good but early sign of potential growth for the 1st Quarter. Driven by a strong fundamental backdrop and optimism over an imminent U.S.-China trade deal, stocks are off to their best calendar-year start since 1987.

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