Markets, economic indicators and corporate earnings are all looking up in 2017. Questions still remain about how the Trump administration’s implementation of new policies will play out, but the investment community is pretty bullish.
Estimize research indicates that corporate earnings growth in 2017 could be the highest since 2011. After six consecutive quarters of negative growth for S&P 500 profits and revenues (from Q1 2015 to Q2 2016), Q3 2016 showed modest improvement. Momentum in Q4, although not yet fully reported, looks solid, pushed along by a strong holiday shopping season and the uptick in crude oil prices. Early earnings estimates for 2017 growth of 13% show a marked improvement from 2016’s 1%. Upward revisions for 2017 are banking on some big comebacks from sectors that have been lagging, including energy, materials and financials.
For the last two years, the energy sector has been the biggest drag on the S&P 500, hitting its lowest point in Q1 2016 with year-over-year profits plummeting 109%. In 2017, energy earnings are anticipated to top 350% growth based on improving oil prices.
Toward the end of 2016, energy rebounded, boosted by an agreement from OPEC and non-OPEC producers like Russia, to collectively cut output by nearly 2 million barrels a day (about 1% of global supply). In addition, oil and gas companies couldn’t have a better advocate, if confirmed, than former Exxon Mobil (XOM) CEO Rex Tillerson as Secretary of State. And President Trump has promised to reduce regulations on energy. This helped catapult oil above the $50 a barrel mark, and has many experts saying it will rise to and stay in the $60 to $70 range throughout the year.
Another beneficiary of higher oil are companies within the materials sector. As commodities prices suffered last year, the metals and mining sector in particular was negatively impacted. While base metals have improved since then, precious metals, particularly gold, have not done well. Steel on the other hand, often seen as a proxy of global growth, made great strides with the Dow Jones U.S. Steel Index rising 75% by the end of 2016 thanks to a huge push in the last two months of the year. As Trump commits to greater infrastructure spending, steel prices should benefit further. Estimize is looking for materials profit growth of 16.4% for 2017.
Financials are expected to be the third biggest winner in terms of corporate profits in 2017 with a 14.7% increase from 2016. Banks should profit from the return of interest income. The Fed raised rates a quarter point in December and is forecasting three quarter-point increases in 2017. Retail bank operations are predicated on net interest margins (the difference in the amount received for a loan and what is paid to savers). Since the financial crisis, this measure has struggled thanks to near zero interest rates.
The other big plus for banks is a promise by Trump to largely “dismantle” Dodd Frank. The appointment of several former bank execs, including four Goldman Sachs alumni to top cabinet posts, bodes well for the financial sector. Not to mention that as the economy continues to improve, borrowing costs rise and banks have the opportunity to profit more on loans.
So if energy, materials and financials are estimated to be the winners of 2017, who are the losers? Well, other than the newly added real estate sector, no sector is expected to be in the red for the year, but telecommunication services and utilities are only expecting single-digit growth (see “Sector rotation”). Seeing the cyclicals anticipated to lead the index for the year, and defensives lag, is a good foreshadowing for the strength of the economy and prospect for improving global growth for 2017 and the foreseeable future.