Analysts tracking US companies are probably a little bit stressed out at the moment. The tax-reduction programme pushed through by the Trump administration at the end of last year has resulted in a new constellation for estimates – relating to earnings, dividends and share buybacks alike – for 2018 and the years which follow. The upside here will only show up in full for the first time in the company reports for Q1 2018 which will replace the uncertain analyst estimates that we have had to make do with to date.
In certain individual cases, tax effects can be expected to feed through to earnings leaps of up to 20%. The healthy operating performance by US companies also needs to be taken into account – S&P 500 operating earnings are likely to turn out to have spurted ahead by approximately 7 percent. According to the data supplier FactSet, the estimated overall earnings growth rate for the S&P 500 in the first quarter is 17 percent, and as high as 19 percent with respect to 2018 as a whole.
It is worth mentioning in this context that all major sectors in the USA are currently registering earnings growth, meaning that the upswing is resting on a broad set of shoulders. Companies from the energy/oil, banking and technology sectors, which are racking up very handsome growth rates thanks to the sunny business climate in their industries, remain the pacemakers for the upward trend in earnings growth. It should be noted, though, that these three sectors are among the most export-heavy and employment-intensive within the US economy and that they would therefore be particularly vulnerable in the event of an escalation in the trade conflict – but also that they may likewise be important for Trump as regards future electoral votes and future tax revenues.
The surge in corporate earnings at a time when the S&P 500 index is holding steady at roughly the same level as before means that the index’s valuation is set to fall back to 15.0 on a price-earnings-ratio basis in 2019. The valuation on which the world’s largest equity index is trading is therefore reverting back to the long-term-average zone, making the S&P 500 fairly valued. However, in view of the threat of a fully-fledged trade conflict and of the high level of dependency of the US equity market on a few tech stocks (Facebook being a classic case in point) where a certain amount of hot air has recently escaped from the valuation air pocket, we see more attractive investment opportunities in Europe than in the USA at the present point in time.