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US companies end the year with high earnings growth

The US companies end the year with the highest earnings growth since 2010.

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S&P 500 ends the year with the highest earnings growth in 8 years. The estimated earnings growth rate for 2018 is 20.3%. All 11 sectors are projected to report year-over-year growth in earnings, while 9 of them are predicted to report double-digit earnings growth, led by the Energy, Materials, and Financials sectors.

The Energy sector is expected to report the highest (year-over-year) earnings growth of all eleven sectors at 108.3%, strongly supported by the crude oil prices and stabilization of commodities. The Materials sector is the second with 30.5% and third is Financial sector with 24.6%.

The strong growth of the US companies comes amid the tax reform, which passed in late 2017 and was a significant contributor to earnings growth for the index in 2018, as the corporate tax rate was lower in 2018 relative to 2017. Shortly after the tax bill became law, analysts began raising company-level EPS estimates for 2018.

From November 30, 2017, through February 28, 2018, the estimated earnings growth rate for increased by more than 7 percentage points (to 16.8% from 9.5%). Meanwhile, over the first three quarters of 2018, the (aggregate) effective tax rate (income taxes divided by pretax income) for the S&P 500 has been 19.0%. This compares to an (aggregate) effective tax rate of 25.7% over the first three quarters of 2017.

Energy stocks outlook

The outlook on energy stocks is positive for 2019, with OPEC+ quota deal agreed in early December. Although many analysts consider that oil prices will collapse in the first quarter of 2019, the trend by the end of the year is positive with expectations remaining bullish.

Chevron and Exxon Mobil are both down this year, but some analysts say the former can keep outperforming the latter. Chevron has held its ground better than Exxon.

Earlier this year, Exxon was the better performer, but as we neared the end of the year, that dynamic reversed. With just a few trading days left on the year, Chevron stock has lost less, and it earned a place on analysts picks list.

Chevron trades around two times enterprise value to debt-adjusted cash flow, and at a 400 basis point discount to 2019-2020 free cash flow yield. Chevron has actually traded with a lower oil beta, outperforming Exxon by 600 basis point, albeit still down on an absolute basis.

The strong earnings execution from Chevron, a negative revision to expectations for chemicals margins/refining margins for 2019-2020 (where Exxon has more exposure) and a lower Brent breakeven, which enables Chevron to cover its dividend at 50 USD per barrel on Brent.

Technology stocks outlook

Apple stock is poised to end 2018 about where it started the year. It had been up as much as 25%, soaring past market value of 1 trillion USD in early August, but then investors soured on the stock amid slowing iPhone sales.

Apple stock will be in the doghouse until late 2019 when investors begin to accept Apple more as a services company than a hardware company. Apple might not return to its 1 trillion USD valuation milestone in the new year.

To make up for softness in iPhone sales, Apple is focusing on services and wearables. The big services story for Apple in 2019 will be the expected launch of a streaming video service to compete with the likes of Netflix and Amazon Prime Video.

Despite the analyst’s bearish outlook, Apple watchers more generally are still overwhelmingly bullish. According to Reuters, Apple currently has 13 “strong buy” ratings from analysts, 10 “buy” and 20 “hold” ratings, with no “sell” or “strong sell” ratings.

These analysts have an average target price of 215 USD per share. The stock currently trades at 157 USD per share and Smithers’ prediction would see it fall to 117.75 USD per share — a price it hasn’t seen since early 2017.

On another hand, Amazon stock has fallen over 16% in the last three months as part of the larger market pullback driven by the likes of Apple and other giants. The company is coming off a third quarter that saw its revenues jump 29% to 56.6 billion USD. This topped Wall Street estimates but marked a slowdown compared to the e-commerce giant’s recent growth.

Looking ahead, Amazon’s fourth-quarter revenues are projected to jump 18.5% to reach 71.61 billion USD. Meanwhile, the firm’s fiscal 2018 revenues are expected to surge 30.8% to reach 232.69 billion USD. Peeking ahead to fiscal 2019, Amazon’s top line is projected to reach 280.4 billion USD, which would mark a 20.5% jump above our 2018 estimate.

However, chip markets might suffer from some turbulence during the year, as the analysts show reduced demand for video cards and processors, related to crypto-mining.