Investors look to global
growth for earnings power
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[April 08, 2017]
By Caroline Valetkevitch
NEW YORK (Reuters) - America First may be a
main policy of the White House and fuel to the stock market rally but
U.S. investors are looking overseas for stronger earnings as S&P 500
companies are set to report their first quarter of double-digit profit
gains since 2014.
A strong earnings season would help justify pricey stock valuations,
with the S&P 500 rallying this month to its most expensive since 2004 on
a forward price-to-earnings basis.
While the U.S. economy has gotten a lot of attention since the Nov. 8
election and President Donald Trump's vows to boost the domestic
economy, data during the quarter has suggested the global economy is
strengthening.
That is welcome news for S&P components, since nearly half of their
sales come from overseas.
Shares of the biggest U.S. companies, which tend to have the most
overseas exposure, have been among the strongest performers over the
past several weeks. For instance, the S&P 500 <.SPX> has outperformed
its average stock <.SPXEW> this year since mid-February, after
performing mostly in line at the beginning of the year.
[http://www.bit.ly/2oQPVXF]
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"The fact that we're seeing stabilization in the global community will
bode well for multinational companies and help earnings for the first
quarter," said Terry Sandven, senior equity strategist at U.S. Bank
Wealth Management in Minneapolis.
"You've also seen the dollar not appreciate as much as many had forecast
a quarter ago, so multinational companies may get some relief on the
(foreign exchange) line," he said.
A weaker dollar boosts offshore revenues when they are translated into
the U.S. currency. The U.S. dollar index <.DXY> was down 1.8 percent in
the first quarter, but it was still cheaper during last year's first
quarter.
STRONGER DATA AS EARNINGS LOOM
A survey this week showed euro zone business activity at a six-year
high. Forecasts from the International Monetary Fund show a pickup in
the global economy in 2017 and 2018, especially in developing economies.
However, some investors worry multinationals may have already priced in
big gains in earnings.
"As long as nothing changes, these firms are going to be fine," said
Jack Ablin, chief investment officer at BMO Private Bank in Chicago,
speaking of the strength of the largest American companies.
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A trader works on the floor of the New York Stock Exchange (NYSE)
before the opening bell in the Manhattan borough of New York, U.S.
April 4, 2017. REUTERS/Brendan McDermid
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He warned, however, that stock prices may have taken in any good news. "The
market has certainly fully discounted all that."
The U.S. earnings season gets under way next week, with results from banks
JPMorgan Chase <JPM.N>, Wells Fargo <WFC.N> and Citigroup <C.N> among others.
The financial sector is projected to post a 15.4 percent profit gain, second
only to energy among S&P sectors.
Energy companies, which carried most of the losses that extended an S&P 500
earnings recession until the second quarter of last year, are expected to do
most of the heavy lifting this earnings season with a whopping 600 percent
increase.
For the entire S&P 500, analysts are projecting earnings up 10.1 percent
compared with a year ago, which would be the first double-digit increase since
the third quarter of 2014, according to Thomson Reuters data.
Excluding the energy sector, S&P 500 earnings are expected to be up 6.1 percent.
Revenue is expected to have jumped 7 percent, the most since 2011, which should
help compensate for higher wage and other costs facing companies, strategists
said.
"We're seeing revenues contribute materially more to that bottom-line growth,"
said Patrick Palfrey, senior equity strategist at RBC Capital Markets in New
York.
Big profit gains are expected in technology and materials as well, the data
showed.
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"It comes down to a synchronized global economic acceleration ...; a rebound and
stabilization in commodity prices and a higher interest rate environment,"
Palfrey said.
(Reporting by Caroline Valetkevitch; Editing by Rodrigo Campos and James
Dalgleish)
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