2017 Earnings Were Led By Energy, Materials, and Tech
At the beginning of the year, I expected 5%-7% earnings growth for 2017 based on the trend of earnings reports missing estimates. As we've discussed throughout the year, this year has been different from the past few because it has come close to meeting the initial estimates. As you can see from the chart below, earnings growth is expected to be 9.6% in 2017. With 3 quarters in the books, it would be surprising if the earnings fall to my range. This quarter was bolstered by energy which had 274.6% growth, materials which had 23.3% growth, and technology which had 14.5% growth. Obviously, the earnings growth in energy is unsustainable, while most expect tech to continue its growth. Without energy, earnings growth would have been 6.9%. Oil and Gas Equipment and Services had 165% growth. The energy sector had $10.6 billion in earnings in 2016 and $39.7 billion in earnings in 2017. Since tech is the biggest sector, it is the most important sector to focus on. The best industry within the tech sector was Semiconductor and Semiconductor Equipment which had 39% growth.
Future Earnings Expectations
As you can see from the chart below, 2018 earnings are expected to be driven by energy, materials, financials, and technology. Energy, materials, technology are expected to see a deceleration, while all the other sectors are expected to see acceleration. The winners of 2017 are expected to be the winners of 2018 and the underperformers of 2017 are expected to underperform in 2018, besides the financials which are expected to switch from underperforming to outperforming. This all adds up to 11.8% growth. It's debatable if the growth being more balanced is a good thing. On the one hand, one sector missing expectations will have a smaller effect on growth because most sectors are expected to do well. On the other hand, the sectors with the most earnings are still going to be the most important. It's also possible analysts are more focused on mean reversion than what firms are guiding to, meaning some of the improvements from the laggards won't occur.