If you want a reason to be optimistic about the S&P 500 look no further than fourth-quarter earnings.
After falling for five consecutive quarters, S&P 500 earnings growth is back in the green. It started last quarter.[ad#Google Adsense 336×280-IA]Third-quarter earnings grew 2.1% from the same period last year, a marginal victory on the chart but a big win for morale, breaking a five-quarter losing streak.
Fourth-quarter earnings show an improvement from there. As of February 10, 71% of S&P 500 companies had reported fourth-quarter results, according to FactSet Research.
From that group, earnings were up 5.0% from last year. This marks a strong reversal out of the earnings recession that began in 2015.
Looking forward, earnings are expected to accelerate throughout 2017.
Take a look at the earnings growth projections below.
This return to earnings growth is a powerful macro force that I expect to be supportive of the S&P 500 this year. History also tells me that companies delivering the best earnings surprises will do even better and benefit from one of Wall Street’s best-kept secrets.
The Post Earnings Announcement Drift (PEAD) is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (or several months) following an earnings announcement. Take a look at the chart of return distributions below.
This study demonstrates that companies beating earnings tend to outperform the S&P 500 in the weeks and months following a positive earnings surprise.
Today, I want to help you profit from this data. I have compiled a list of seven of the S&P’s best stocks now surging on earnings surprises from the fourth quarter. These companies are well-known global leaders. I am expecting the S&P 500 to have a strong up year in 2017. But I am expecting these companies to do even better. Take a look below.
From the group I have chosen to highlight JPMorgan and Exxon Mobil because they just delivered two of the best earnings surprises and are both on pace for big earnings growth in 2017.
JPMorgan (NYSE: JPM), always one of the S&P’s best stocks, now has delivered awesome fourth-quarter results. Earnings of $1.42 beat expectations by 20.42%. JPMorgan has beaten expectations by an average of 12.20% in the last four quarters.
The strong performance was driven by rising interest rates. JPMorgan is one of the few companies that benefits from rising interest rates because it becomes more profitable to make loans to consumers and businesses. In the second half of 2016, interest rates spike higher.
Looking forward, interest rates are set to continue rising in 2017, and JPMorgan is in position to capitalize. Earnings are expected to grow 6% in 2017 and another 13% in 2018. Shares of JPM are already up 30% in the last three months.
Despite those outsized gains and optimistic growth projection, JMP is undervalued. Its forward P/E ratio of 13.6 is a discount to the industry average of 15 and an even bigger discount to the S&P 500’s 17.
Exxon Mobil (NYSE: XOM) also reported excellent fourth-quarter results. Earnings of $0.90 beat expectations by 25%. That is a big statement from Exxon that the energy industry is back with force after being crushed by the low price of oil in 2015 and early 2016.
Exxon is on pace to deliver huge earnings growth in 2017. Analysts are projecting earnings to jump 78% in 2017 and another 15% in 2018. The company also offers one of the best dividends in the S&P 500. Its current yield of 3.64% is an 80% premium to the S&P 500’s 2.0% yield.
Exxon also looks like a good value play. It’s forward P/E of 20 is in line with the industry average and S&P 500. But when you factor in earnings growth in 2017, that number actually falls to 16.5.
Risks To Consider: Companies with a history of delivering positive earnings surprises will gradually see expectations rise. These companies need to keep delivering strong earnings growth to keep new capital slowing into shares.
Action To Take: I am expecting the S&P 500 to close in the green in 2017, driven by its recent return to earnings growth. However, history tells me that companies with the best quarterly earnings surprises should do even better. Position in some of the S&P’s best stocks now by buying JPMorgan and Exxon Mobil below the 52-week high. Hold until the end of 2017.
— Michael Vodicka
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Source: Street Authority