S&P’s best sectors look to repeat in 2018

Earnings

Whether or not the corporate tax rate drops to 20% won’t matter much to U.S. companies, which have put up a stellar performance this year and are expected to continue their run into 2018. The S&P 500 saw earnings grow nearly 10% in 2017 (through Dec. 4), an annual rate not seen since 2011.

These companies have more cash on hand than they know what to do with, and while share buybacks dropped in 2017, dividends saw record levels, with capital expenditures and research and development increasing as well. 

In 2018, S&P 500 earnings growth is expected to be flat, but two consecutive years of double-digit profit growth would still be nothing to sneeze at. Five of the 10 S&P sectors are estimated to put up double-digit year-over-year growth. 

After getting crushed in 2015 and 2016, commodities are back. The Energy and Materials sectors were the top two performers of 2017, and are expected to hold those titles again in 2018. Year-over-year comparisons are getting more difficult as prices in oil and metals normalize. The triple-digit profit growth for many of these names in 2017 will not be duplicated, though the Energy sector is anticipated to put up earnings per share (EPS) growth of 32%, with Materials following at 25%.

Next up we have Financials and Information Technology, both expected to see year-over-year EPS increase by 15%. Insurers helped boost the bottom line for the Financials sector in 2017, with analysts anticipating names like AIG (AIG), Progressive (PGR) and Travelers (TRV) will have a repeat performance this year. Within tech, the focus will continue to be on Internet Software & Services names such as Facebook (FB) and Alphabet (GOOGL) as well as Semiconductors such as Micron (MU), Advanced Micro Devices (AMD) and NVIDIA (NVDA). Chip names have been leading tech for the last year as the demand increases outside of personal computers and into things like gaming consoles and automobiles. 

No companies are expected to post negative EPS growth in 2018, but the laggards are Utilities and Telecommunication Services at 4% and 0%, respectively. These are the smallest sectors in the S&P 500, by number and market cap. 

Revenue growth tends to run slightly lower than earnings growth, and 2018 is not expected to be an exception. However, in many cases revenue growth is the more important number to watch as it cannot be manipulated in any way with accounting methods; sales are more straightforward. Overall, the S&P 500 is expected to put up revenue growth of 5%. The leading sectors are Technology with 10%, and Energy and Consumer Discretionary at 6%. Only Telecom expects a decline of 1.5%. 

After three years of stagnating corporate earnings, 2017 showed improvement that should be sustainable. The environment remains ripe for large-cap names, supported by improving GDP, strong employment numbers, and an empowered consumer. The only hope is that we’ll see U.S. corporations more efficiently put their money to use in the year ahead.    

About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ.