Corporate earnings trends in the U.S. are constructive for the remainder of 2017 and into 2018.

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So says Paul Roukis, managing director and portfolio manager at Rothschild Asset Management in New York. “If we were to use the S&P 500 as a proxy, earnings are projected to increase by about 8% in 2017 to about $128 [per share]. This follows a multi-year period of stagnation, so it’s a positive to see earnings trends, and it’s a positive underpinning for U.S. equities.”

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Roukis, whose firm manages the Renaissance U.S. Equity Value Fund, says much of the growth is driven by “a recovery in profits for the energy companies, following the bounce off the bottom in commodity prices and corporate reorganizations that lowered cost structures.”

Financial services companies are well-positioned for growth, he adds, saying, “For the first time in many years, the banks should experience operating leverage due to a rebound in net interest margins in the wake of the [U.S. Federal Reserve] embarking on a path toward interest rate normalization.”

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Limiting factors: interest rates and policy

One potential driver of corporate profitability is government policy, says Roukis. “The question is: can the Trump administration get through rational, pro-growth policies that were promised to voters, such as tax reform, a rollback in financial and energy regulation and an infrastructure bill?”

Those policies could affect companies and industries in different ways, he adds, and “you’ll see winners and losers. However, by some estimates, such policy adjustments could add upwards of $10 or so to S&P 500 earnings [per share] and, importantly, these are not incorporated into consensus expectations. So there’s room for upside.”

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Currently, says Roukis, “2018 earnings expectations call for about 6% year-over-year growth to about $136 to $138 [per share]. So there’s certainly some optionality to cooperation in Washington, which the market has not yet fully digested.”

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Another thing to consider is interest rates must rise for the right reasons, says Roukis, who points to rising inflation that’s fuelled by growth as an example. On the other hand, “if growth stagnates, but people are concerned about [things like] inflation [and] budget deficits, then you could see a problem,” he says.

The timeline for interest rate increases is also a factor. “If interest rates rise 25 to 50 basis points casually over the next six to 12 months […], we’re okay. If interest rates […] shoot up 100 basis points quickly, […] there’s a shock to the system [that] could create another credit cycle.”

He doesn’t expect the latter, noting that “U.S. banks have been very conservative with respect to underwriting on mortgages.”


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