Blockbuster first-quarter earnings were 'as good as it gets'

Want evidence that first-quarter earnings season was a resounding and undeniable success? There are a bunch of choices.

First and foremost, US stock indices surged to record highs as corporate results streamed in. After all, profit expansion has historically been the biggest contributor to share price appreciation.

You also had 66% of companies beating estimates on an earnings-per-share (EPS) basis, and also 60% of companies exceeding sales forecasts, according to data compiled by Bank of America Merrill Lynch. Both marked 13-year highs.

Of course there’s also earnings growth of 14% on a year-over-year basis — 15% including buybacks — the best in five years. And revenue topped estimates by 0.6%, the biggest beat since 2014, the data show.

Overall, the earnings were “as good as it gets,” a group of BAML equity strategists at the firm led by Savita Subramanian wrote in a client note on Wednesday.

Even better yet, a wide range of sectors got in on the action. While financials and energy were the two groups most responsible for first-quarter growth, year-over-year profit expansion was still 8% with them removed from the equation.

Not to mention consumer discretionary and industrial companies, which were expected to see earnings contract, only to surprise forecasters by growing.

That’s not to say it was all positive, particularly for so-called crowded stocks, defined as ones heavily owned by active managers. They found themselves in a precarious situation, punished to a greater degree for earnings misses.

Crowded stocks that whiffed on both profit and revenue underperformed less concentrated companies by 0.5 percentage point the day after reporting, and then another 0.7 percentage point over the next five days, BAML data show.

With the first quarter firmly in the rear-view, the question now is whether companies can keep it up. While BAML doesn’t think it will reach the heights seen last period, the firm still forecasts year-over-year EPS growth of 9%. That’s higher than the average analyst forecast of 7.3% expansion, Bloomberg data show.

Amid the improving earnings, Wall Street strategists are mixed about the prospects of the S&P 500 through the end of the year. On average, they see the benchmark slipping 1.3% from Tuesday’s close to 2,408, according to a survey of 19 firms conducted by Bloomberg. Subramanian, however, has a year-end price target of 2,450, about 0.5% higher than current levels.

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