We expected another strong earnings season, and corporate America delivered with S&P 500 Index year-over-year earnings increasing 28% in the third quarter. A pickup in economic growth, strong manufacturing activity, and tax cuts were key drivers, but even without the tax reform boost, earnings growth exceeded 20%.
“Both revenue and earnings soundly beat expectations this earnings season, making prior assertions of an earnings growth peak premature,” said John Lynch, chief investment strategist for LPL Financial. “Companies’ outlooks were generally upbeat even in the face of tariffs and building wage pressures.” Not surprisingly, tariffs have been a popular topic on earnings conference calls, as shown in today’s LPL Chart of the Day. The good news is that most companies have indicated that the impact has been limited. Many companies are taking a wait-and-see approach before relocating supply chains, which we think is prudent.
Generally upbeat company guidance suggests that the impact of tariffs on corporate profits may be manageable. Since third-quarter earnings season began, S&P 500 earnings-per-share estimates for the next four quarters have fallen by 1.1%, better than the historical average decline of roughly 2%. We have also been encouraged by firms’ ability to continue expanding profit margins amid rising wages, though opportunities for further margin gains in 2019 may be limited.
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