Executive Summary

Earnings Growth Set to Slow in 2018. S&P margins and earnings are now at record levels, while sales growth has accelerated in recent quarters. Likely reflecting tough comparisons, as well as anticipation of Federal Reserve interest rate hikes that could curb economic growth, the consensus expectation is for earnings growth to slow sharply in 2018.

A Risk of Earnings Disappointments. Even as profits moved to record levels, 2017 earnings expectations have continued to fall, albeit modestly, suggesting that analysts have been a little too optimistic. But, with earnings growth forecast to slow in 2018, that raises the risk of earnings disappointments if expectations remain too high.

Sector Forecasts. All sectors are currently forecast to experience earnings growth in 2018, which seems unrealistic. Energy, a key swing sector, is expected to see a 40% gain in profits, which is likely highly dependent on the direction of oil prices.

Market Outlook. Slower earnings growth and higher interest rates could well pressure stock prices in 2018, especially with valuation multiples still elevated.

ESG Matters. We have added a new section to this report, which recaps key Environmental, Social and Governance (ESG) developments during the month.

Figure 1: S&P 500 Operating EPS ̶ Consensus Estimates for 2018
Year-to-year percentage change in quarterly EPS

Source: S&P, Cornerstone Capital Group

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Michael Geraghty is the Equity Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.