The Sectors Likely To Deliver Double-Digit Earnings Growth In Q1

The profit growth of S&P 500 companies continues to be buoyant and is one of the factors responsible for the current bull market. Early indications suggest the momentum is set to continue. With the first-quarter reporting season around the corner, here's a look at how the season is likely to pan out and the sectors that are most likely to report standout performance.

Adobe Systems Incorporated ADBE stock set up a tryst with its all-time high — both on an intra-day and closing basis — March 16 after the documentation software company reported forecast-beating results for its first quarter.

Oracle Corporation ORCL stock took a beating following lukewarm results.

Elevated Q1 Expectations

S&P 500 companies are estimated to report earnings growth of 17 percent year-over-year for the first quarter of 2018 which, if it materializes, would mark the highest rate since 19.5-percent figure seen in the first quarter of 2011, Factset said in its March 16 Earnings Insight report. 

The robustness appears to be broad-based. All 11 S&P sector classes are expected to report year-over-year earnings growth, with seven of these likely to report double-digit growth.

Revenue growth for the S&P 500 companies is estimated at 7.2 percent, with all 11 sectors expected to report growth.

MNCs Have An Edge

Higher global growth and a weaker dollar are likely to support companies in the S&P 500 Index with higher global exposure, the Factset report said.

World Bank estimates that the economy globally will grow 3.1 percent year-over-year in 2018, which comes on top of solid 3-percent growth in 2017, thanks to continued recovery in investment, manufacturing and trade.

The U.S. dollar is down 2.8 percent quarter-to-date through March 20 against the euro. The greenback has shed 5.6 percent against the yen during the same period.

Source: Factset

See also: Earnings Season: Your Guide To When Each Sector Reports

Oil Companies Gush With Optimism

The honors for highest year-over-year earnings growth are likely to go to the energy sector, which is projected to experience 82.3-percent profit growth. Higher oil prices and easy earnings comps are likely to provide a shot in the arm for energy names. 

Oil prices averaged $62.61 so far in the first quarter versus $51.78 in the year-ago quarter, according to Factset. 

Among the su-sectors, oil and gas exploration and production; oil and gas refining and marketing; oil and gas equipment and services; and oil and gas drilling companies are likely to report solid growth.

Materials: A Distant Second

Factset estimates 41.3-percent profit growth in the materials space, with the bulk of the upside coming from the combined DowDuPont Inc DWDP. The year-ago numbers included the standalone Dow Chemical Company.

If DowDuPont earnings were excluded, profit growth in the sector would dwindle to 28.5 percent. The gains are likely to be led by the metals and mining subsector.

IT Notches Third Place

The third highest year-over-year profit growth is likely to be reported by the IT sector, at 20.9 percent, with all seven subsectors expected to report earnings growth. The semiconductor and semiconductor equipment, technology hardware, storage and peripherals, internet software and services, IT Services and software are likely to show strength.

Financials Not Far Behind 

Financials are estimated to report 20-percent profit growth, with the diversified financial services, consumer finance, capital markets and insurance subsectors expected to report double-digit growth. 

A Bright Forward Outlook 

The profit growth rate for S&P 500 companies is expected to accelerate further in the second and third quarters, peaking at 20.8 percent in the third quarter. Subsequently, the growth pace is expected to moderate, although remaining in the double-digit range.

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