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High Expectations For First Quarter Earnings

Another strong earnings season is on tap.

Banks, for example, came out swinging for the fences, as Citigroup (NYSE:C) beat earnings with EPS of $1.68, as compared to expectations of $1.61. JP Morgan beat both the top and bottom line with earnings of $2.37 on revenue of $28.52 billion.

Wells Fargo (NYSE:WFC) beat projections with EPS of $1.12 as compared to $1.07 expectations on revenue of $21.9 billion, which also beat expectations for $21.7 billion. Even Goldman Sachs reported better than expected earnings and revenue for the first quarter, boosted by a 38%jump in equities trading revenue.

Then, Netflix (NASDAQ:NFLX) posted in-line EPS of 64 cents, which met expectations on revenues of $3.7 billion, as compared to expectations for $3.69 billion. The big news for NFLX was its addition of another two million U.S. subscribers, as well as guidance for EPS of 79 cents, as compared to expectations for 65 cents.

"The Q1 earnings season has started solidly," said Jeremy Klein, chief market strategist at FBN Securities, as quoted by CNBC. "Corporate executives have not only easily beaten extremely aggressive top and bottom line estimates in aggregate, but have also spoken effusively about their business prospects. Nothing matters more for the health of the rally than the ability of companies to churn out profits."

Better yet, the Street has high expectations for this earnings season, with analysts expecting a 17.3% increase in first-quarter earnings, as reported by CNBC.

Forcing earnings higher are catalysts such as solid U.S. and overseas economic growth. U.S. economic growth for instance is expected to increase 2.8% year over year in Q1 2018. Around the world, growth is relatively solid even though we’ve seen some slowing in Europe.

Earnings are also likely to benefit from the new tax law.

According to LPL Financial:

“Earnings estimates for the first quarter have increased by about 6% so far this year, due almost entirely to the Tax Cuts and Jobs Act increase was the biggest ever (according to data from Ned Davis Research) and is about 10% better than the average quarterly change of a 3–4% decline. The reduction in the corporate tax rate is the biggest factor; however, individual tax cuts, incentives to encourage capital investment, and repatriation of overseas cash could have driven some of the increase as well (and may offer the potential for a future boost).”

We’re seeing stronger manufacturing activity, and a weaker dollar, which increases overseas earnings for U.S.-based multinational companies.

In short, these are exciting times for those of us looking for a distraction from headline noise. We’ll keep you up to date on what happens with earnings in The Cheap Investor.

Also, be on the lookout for the May 2018 issue of The Cheap Investor, which comes out shortly.