The S&P 500 index’s earnings continue to impress investors. Analysts were forecasting a good quarter for corporate earnings and ended up with a great one. With 99% of companies reporting through December 8th, S&P 500 sales have grown 8.17% and earnings have grown 12.94%, both better than forecast (source Bloomberg). With the S&P 500 rising 16.40% year-to-date, only slightly more than earnings growth, a strong year for stocks has been supported by improving fundamentals.
Earnings growth was broad-based, across market sectors. With the technology sector showing revenue growth for the quarter of 15.12% and earnings growth of 27.47%, it is no wonder technology stocks are leading the market (source: Bloomberg). Financial companies also did well, with earnings growth of more than ten percent. With only 1.22% revenue growth, the energy sector was the only one with revenue growth less than four percent, mostly due to declining oil prices.
These strong third quarter results demonstrate the durability of S&P 500 sales and earnings growth. While there could be pockets of weakness due to the shutdown, aggregate earnings are expected to grow nicely into the fourth quarter and beyond (source: Bloomberg). Given this background, it is hard to get too defensive on equities, despite elevated valuations. It does make sense to trim winners and manage risk. Continuity remains wary and sees the market as susceptible to pullbacks. We do not think a deep or sustained pullback is likely, however, unless the rate of inflation accelerates.