Major Moves

With 96% of the S&P 500 components having reported their quarterly numbers, the Q4 2018 earnings season is almost over. It has been a surprisingly good earnings season. Many analysts were wondering if the numbers were going to hold up, but they have.

Of the S&P 500 companies that have reported, 69% have beaten earnings expectations and 61% have beaten revenue expectations (according to FactSet). While these aren't the best numbers we've ever seen – the earnings numbers are slightly below the five-year average, while the revenue numbers are slightly above the five-year average – they are not concerning either.

In fact, if the blended earnings growth rate of 13.1% for the quarter holds until the remaining 4% of the S&P 500 companies have officially announced, it will be the fifth straight quarter of double-digit earnings for the index. Not too shabby.

When you break down the earnings performance by sector, only one sector failed to have more than half of its companies deliver earnings above estimates: the real estate sector. The information technology sector led the way with 85% of its companies beating estimates, while the industrials, consumer discretionary and health care sectors were not far behind with 80%, 79% and 77% of their companies reporting earnings that were above estimates, respectively.

S&P 500 earnings vs. estimates, Q4 2018

S&P 500

The S&P 500 bounced back from three consecutive down days to close out the week on a positive note today. By closing at 2,803.69, the index enjoyed its highest close since Nov. 8, 2018. The S&P 500 had a higher intra-day high on Feb. 25, but the index closed below 2,800 that day.

Resistance at 2,816.94 is still firmly in place, but with the potential for good news coming out of the trade negotiations between the United States and China, we may see the S&P 500 breaking through in March.

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Risk Indicators – GDPNow

Earlier this week, we got our first look at the Q4 2018 gross domestic product (GDP), and the numbers were much better than expected – coming in at a growth rate of 2.6% instead of the consensus estimate of 2.2%. Unfortunately, our first peek at the Federal Reserve Bank of Atlanta's estimate for Q1 2019 GDP isn't nearly as rosy.

The Atlanta Fed maintains an indicator it calls GDPNow that tracks the group's estimates of what the GDP growth rate for the current quarter is going to be. The analysts at the Atlanta Fed update their estimates whenever new economic data – like personal consumption expenditures (PCE), the consumer price index (CPI) or trade balance numbers – are released.

This indicator is far from perfect. Early estimates never tell you what the Final GDP is going to be for the quarter. Even late estimates that get issued right before the Advance GDP number is announced for the quarter can come in too high or too low.

However, while it may not be useful for predicting exactly what the GDP number is going to be, GDPNow is helpful for gauging market expectations. On Wall Street, expectations are everything. If expectations are bullish, the stock market is going to move higher. If expectations are bearish, the stock market is going to move lower.

Looking at the GDPNow chart, you can see that the first print of the Atlanta Fed's expectations for Q1 2019 GDP growth is woefully low at a measly 0.3%. This is well below the Blue Chip consensus estimate of 1.9%. While this number could eventually get revised higher if more positive economic data comes out, it sets an initial bearish expectation on Wall Street of paltry growth during the current quarter.

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Evolution of GDP estimate for the first quarter of 2019

Bottom Line: More Than One Way to Boost Earnings

I've discussed two apparently contradictory indicators today. On one hand, I've highlighted strong earnings growth among S&P 500 components during Q4 2018. On the other hand, I've highlighted concerns about weak economic growth in Q1 2019.

While these two items may seem to be at odds, they don't necessarily have to be. Even if the U.S. economy doesn't grow at a stellar rate this quarter, corporate America may still be able to deliver strong earnings growth in Q1 if it can continue to widen margins. Even if top-line revenues don't grow as quickly as traders may want them to, it doesn't mean bottom-line earnings can't increase. It all depends on what happens on the income statement between the top line and the bottom line.

Let's see if management teams can continue to increase efficiency and productivity to boost earnings this quarter even if revenue growth slows down.

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