With the first-quarter earnings season coming to a close, the verdict is in on the synchronized global expansion: It’s alive and well.
A picture of strong earnings growth and positive surprises has emerged across both industries and geography, adding to evidence the world’s major economies are increasingly running in lockstep.
It’s a reassuring development that should bolster confidence in the resiliency of the expansion at a time when economic data have painted a mixed picture. “Hard” data such as gross domestic product have been less convincing than the largely rosier consumer and business sentiment surveys worldwide. A more broad-based recovery should also ease worries about a maturing U.S. business cycle that may no longer be able to do as much of the heavy lifting for the world economy.
“The global backdrop is going to be constructive and this phase of the cycle has longer to run,” said Jean Boivin, head of economic and markets research at BlackRock. “We see these earnings being consistent with this backdrop story.”
Here are some results from the current earnings season:
Earnings growth is the strongest in years. According to Bloomberg Intelligence, the S&P 500 is on pace for 16.5 percent growth in earnings per share in the first quarter, versus initial expectations for 9.1 percent. European earnings are set to rise 14 percent. The first-quarter results in the U.S. are the best since the third quarter of 2011.
It’s synchronized. 2017 is on track to be the first year since 2010 when all major regions should be posting earnings growth, according to Citi strategists. More than halfway into Europe’s earning season, 69 percent of companies had beaten earnings per-share estimates. More then 70 percent of S&P 500 companies had topped the earnings-per-share consensus.
Fueled by the first-quarter results, analysts are forecasting earnings per share growth for the S&P 500 Index of 12.3 percent in 2017 and 10.8 percent in 2018, according to Bloomberg Intelligence data. That’s the biggest two-year advance since 2012.
It’s not just the bottom line. The strong earnings results reflect revenue gains that have been better than expected, a trend also consistent with a pick-up in growth. Half of S&P 500 companies beat first-quarter revenue estimates.
Another barometer: Technology companies and industrials are surprising the most on growth, while defensive sectors like telecoms and discretionary stocks are trailing the pack.
“If we look at what the companies are saying, the evidence of recovery is there for all to see,” Bank of America Merrill Lynch strategists said in a recent note.
It’s improvements for cyclical companies — those that are most linked to the business cycle — that BlackRock cites for concluding “the global economy can sustain above-trend growth.”
Meanwhile, strong earnings results for financial companies — a sector that does well when interest rates are on the rise — suggest the reflation trade that’s lost steam in recent months still has life, according to Boivin.
“The reflation story seems to be on track,” he said.
A synchronized expansion means the global economy doesn’t need to rely as much on the U.S. for growth. That limits the emergence of imbalances that could destabilize global growth, such as an abrupt change in the U.S. dollar that leaves emerging markets vulnerable.
And global economies have rarely been so in sync.