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Earnings Trade Replaces Trump Bump: 5 Top Gainers

Tirthankar Chakraborty

U.S. stocks are hovering near fresh highs, with Apple Inc’s AAPL market value breaking the $800 billion mark for the first time, as earnings trade replaces Trump trade. The best earnings growth pace in five years has propelled Wall Street to new heights, even though, investors question President Trump’s ability to build harmony in Washington to implement business-friendly policies. Investors are concerned that FBI Director James Comey’s abrupt dismissal could delay key items in the administration’s agenda including corporate tax reform, deregulation and infrastructure policies.

Earnings growth has been driven by Industrial Products, Technology, Consumer Discretionary, Basic Materials and Finance, with all of them on track to achieve double-digit gains in the first quarter. Henceforth, investing in fundamentally solid stocks from the said sectors that had crushed earnings estimates will be prudent. Emmanuel Macron’s victory in France’s presidential election has, in the meantime, stabilized the geo-political scenario, which should also bode well for such stocks. After all, market’s “fear gauge” is almost at a decade low.

Earnings Growth Drives Wall Street

Most equity strategists agree that the top catalyst for the market now is earnings. Total earnings for Q1 are anticipated to be up 12.7% from the same period last year on 6.2% higher revenues. As the reporting cycle has proceeded, the Q1 growth pace is on track to be the highest in five years. This will follow 7.3% growth achieved in the fourth quarter of 2016 on 4.7% higher revenues. This further shows that Q1 results represent acceleration in earnings growth.

So far in Q1, 446 S&P 500 index members have already reported results. Total earnings for these companies are up 14% from the same period last year on 7.9% higher revenues, with 72.4% beating EPS estimates and 66.4% coming ahead of top-line expectations. The growth pace for both earnings as well as revenues are tracking above other recent periods, while the proportion of companies beating estimates, mostly revenue estimates, is also higher than other recent periods. The table below shows the current Q1 earnings scorecard for the top five sectors:

Sectors Earnings Growth (YOY) Earnings Beat Revenue Growth(YOY) Revenue Beat
Industrial Products 24.1% 76.2% 9.7% 81%
Technology 17.2% 78.3% 6.8% 80.4%
Consumer Discretionary 16% 76.7% 14.5% 50%
Basic Materials 15.9% 60% 5.4% 75%
Finance 10.4% 72.3% 5.2% 68.1%


Source: The table is taken from this week’s Earnings Trends report.

Trump Trade Deflates

Trump terminated and removed FBI Director Comey on May 9, a development that few saw coming. Trump laid off Comey on clear recommendations of both Deputy Attorney General Rod Rosenstein and Attorney General Jeff Sessions. Trump said that “the FBI is one of the Nation’s most cherished and respected institutions and today will mark a new beginning for our crown jewel of law enforcement”.

This decision made equity strategists emphasize that the days of Trump trade in the market isn’t anymore. For now, investors should refrain from betting on any quick legislation around trade, budget, healthcare or infrastructure. According to Michael Arone, Chief Investment Strategist at State Street Global Advisors “Investors are realizing that the fiscal policy agenda is being pushed out farther on the horizon”. Trump’s pro-business tax, regulation and infrastructural polices are anyhow taking longer to translate into action than investors had hoped.

5 Stocks to Buy with Superb Earnings Growth

The days of the Trump-induced rally in stocks are over. Of late, the Dow, the S&P 500 and the Nasdaq have traded higher on a stellar earnings show. Hence, investing in sound companies from the aforesaid sectors seems sensible. 

Such stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM score of ‘A’ or ‘B’. Here ‘V’ stands for Value, ‘G’ for Growth and ‘M’ for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.

Caterpillar Inc. CAT is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company has a Zacks Rank #1 and a VGM score of ‘B’. Caterpillar reported first-quarter earnings per share of $1.28 that surpassed the Zacks Consensus Estimate of 62 cents (read more: Caterpillar Q1 Earnings Beat by a Wide Margin).

The company’s earnings growth for this year is likely to be 18.4%, higher than the Manufacturing - Construction and Mining industry’s projected gain of 16.1%.

Alphabet Inc GOOGL provides online advertising services in the U.S., the U.K., and the rest of the world. The company has a Zacks Rank #2 and a VGM score of ‘B’. Alphabet’s first-quarter earnings of $7.73 exceeded the Zacks Consensus Estimate of $7.24. Also, earnings were up 2.2% sequentially and 28.4% year over year (read more: Alphabet Beats Earnings & Revenue Estimates in Q1).

The company’s earnings growth for this year is likely to be 24.8%, higher than the Internet - Services industry’s projected gain of 17%.

Royal Caribbean Cruises Ltd RCL is a cruise company. The company owns and operates three global cruise brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises (Global Brands). Royal Caribbean Cruises has a Zacks Rank #2 and a VGM score of ‘A’. The company’s first-quarter earnings of 99 cents per share were 7.6% ahead of the Zacks Consensus Estimate and 10% ahead of management’s guidance of 90 cents (read more: Royal Caribbean Beats on Q1 Earnings, Lifts '17 View).

The company, which belongs to the Leisure and Recreation Services industry, is expected to see solid earnings growth of 18% this year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chemours Co CC is a provider of performance chemicals. The company operates through three segments: Titanium Technologies, Fluoroproducts and Chemical Solutions. Chemours has a Zacks Rank #1 and a VGM score of ‘A’. First-quarter net income was $150 million or 79 cents per diluted share, versus net income of $51 million or 28 cents per diluted share in last year’s first quarter.

The company’s expected earnings growth for this year is 226%, more than the Chemical - Diversified  industry’s estimated rally of 9%.

Health Insurance Innovations Inc HIIQ is a developer, distributor and cloud-based administrator of individual and family health insurance plans (IFPs) and supplemental products. The company has a Zacks Rank #2 and a VGM score of ‘A’. Health Insurance Innovations reported first-quarter earnings per share of 36 cents. The results exceeded Wall Street expectations. The average estimate of four analysts surveyed by Zacks Investment Research was earnings of 31 cents per share.

The company’s expected earnings growth for this year is 30.4%, higher than the Insurance - Life Insurance industry’s estimated gain of 10.9%.

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Alphabet Inc. (GOOGL): Free Stock Analysis Report
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