Summary:

Robust Earnings Environment. The combination of favorable bottom-up factors (sales growth, margin expansion) and a solid economic environment (synchronized global growth) has created a healthy earnings environment. 2017 S&P 500 earnings growth is on track to have been the fastest since 2010.

Rising estimates. Earnings estimate upgrades have been outpacing earnings downgrades lately, in the most extended period of net estimate increases since 2010. Upward estimate revisions have been most significant in the Information Technology and Energy sectors.

U.S. Tax Reform: A Wildcard in 2018. Quite unusually, consensus estimates for 2018 S&P 500 EPS increased late in 2017; estimates typically decline steadily. Even a modest reduction in the effective corporate tax rate in 2018 could materially boost consensus estimates.

Market Outlook. A 5% increase in current 2018 EPS estimates combined with a two percentage point reduction in the P/E multiple (possibly driven by interest rate hikes) would suggest about a 10% gain in stock prices in 2018.

Figure 1: S&P 500 Operating EPS — Consensus Estimate for 2017 and 2018

Source: S&P

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Michael Geraghty is the Equity Strategist at Cornerstone Capital Group. He has over three decades of experience in the financial services industry. Michael has worked as an investment strategist at a number of leading firms. At PaineWebber (1988 – 2000), he was a Senior Vice President and member of an Institutional Investor ranked U.S. Portfolio Strategy team. At UBS (2000 – 2003), he was an Executive Director and senior member of the global equity strategy team responsible for regional and sector allocations. At Citi Investment Research & Analysis (2004 – 2012), Michael was the global themes strategist; Citi was ranked #1 for Thematic Research in the 2011 Extel survey. Michael holds a Master’s degree in Economics and a Masters of Business Administration in Finance from Columbia University.