February 2, 2018 / 6:47 PM / in a year

Wall St Week Ahead-U.S. profit forecasts offer relief amid rate worries

NEW YORK, Feb 2 (Reuters) - Profit forecasts for 2018 are rising fast as analysts factor in benefits from the U.S. tax overhaul, a trend that could temper worries about rising interest rates in the near term.

Wall Street’s main indexes on Friday were headed for their worst week in two years as rates soared in the bond market and renewed fears of inflation gripped investors. But amid the selloff, one of the fundamental factors that drives stock prices - corporate earnings - keeps improving.

Earnings season is in full swing and with half of the S&P 500 companies still to report fourth-quarter results and potentially give guidance on 2018, profit estimates are likely to increase further.

The upward trajectory of forecasts has caught the attention of investors anxious to see signs that earnings can support lofty stock valuations and offset concerns over rising bond yields and the pace of Federal Reserve rate hikes. Rising rates in general mean higher borrowing costs for companies.

The S&P 500 is up roughly 4 percent so far this year, even after giving back gains this week, and rose 19.4-percent in 2017. Whether this week’s downturn in global equity markets continues will depend in part on upcoming earnings reports.

“Stocks may be have been overbought, and some of that was alleviated this week. Earnings are still rising and cash flow is still rising,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

Reports from both Apple and Google parent Alphabet late Thursday disappointed investors, as did Friday’s results from ExxonMobil and Chevron. But fourth-quarter S&P 500 results overall have been much stronger than expected.

Among changes to the tax law, the corporate income tax rate drops to 21 percent from 35 percent, so earnings estimates for the first quarter and all of 2018 have jumped, according to Thomson Reuters data.

First-quarter profit growth for S&P 500 companies is now estimated at 17.7 percent, up from 11.7 percent on Dec. 20, when both houses of Congress approved the tax revamp. Earnings growth for 2018 is now forecast at 18.2 percent, up from 11.5 percent on Dec. 20.

Typically, expectations decline as the earnings reporting season for the quarter approaches. On average, profit growth expectations fall by 4 percentage points from the start of the quarter to the start of earnings season, said David Aurelio, senior research analyst at Thomson Reuters.

This January, there were 4.3 times more positive than negative revisions to S&P 500 2018 earnings estimates, according to Bank of America Merrill Lynch. The one-month ratio of upward to downward revisions was the highest since at least 1986, as far back as the bank’s data goes.

Those upward revisions are likely to continue.

All of the S&P 500 companies together are expected to show earnings of about $155 per share this year in aggregate, up about $9 since Dec. 20, Thomson Reuters’ estimates show.

The tax reform benefit is estimated to add more than that, however - a full $13 - which suggests there “there is more room to run,” BofA-ML strategists said in a note.

“Usually there isn’t an event like this,” which affects so many companies at once, said Jill Carey Hall, equity and quant strategist at Bank of America-Merrill Lynch.

In addition to the tax law, U.S. companies’ earnings are benefiting from improving global economic demand and the weaker U.S. dollar, which helps U.S. multinationals, she said.

Those factors could help to underpin U.S. earnings even after the tax benefit is priced in.

“We step back and look and so far earnings have been awful good,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.

Among companies due to report next week are Walt Disney , General Motors, several biotech companies including Gilead and restaurants including Chipotle Mexican Grill.

Reporting by Caroline Valetkevitch; additional reporting by Chuck Mikolajczak and Lewis Krauskopf in New York; Editing by Alden Bentley and Nick Zieminski

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