2018 EPS Forecasts Are Soaring Amid New Tax Reality

It's not just the S&P that is soaring: so are 2018 full year EPS forecasts.

Over the past few weeks, analysts have been aggressively incorporating the impact of tax reform into their revised forecasts and the bottom-up EPS is now tracking over $150, up more than $2 (1%) over the past week and more than $4 (3%) since mid-December when tax reform was passed.

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According to Bank of America, whose 2018 EPS forecast is even loftier at $153, "expect upward revisions to continue through earnings season, particularly as guidance trends have remained strong as well."

Using a back of the envelope calculation, if one applies a 20x multiple, roughly where the market is trading, to the 4 point rise in forward EPS, it would imply an 80 point move in the S&P just to keep up with the revised earnings forecasts, although as Morgan Stanley explained yesterday, it is unlikely that earnings forecasts will actually receive the full benefit from these revisions, once the negative, second-round effects from tax effects start ro flow through, to wit:

Our strong belief is that the full flow through assumption will be violated however, meaning that  these numbers could be a best case scenario for tax flow through. Our doubt on full pass through of the benefits comes from an analysis of management incentives and early evidence  from companies that have already guided to less than full flow through of the benefits. As we go through earnings season how each company guides to the scope of tax benefits and how analysts choose to model this guidance should create a rise in earnings estimate dispersion.

In other words, after the benchmark EPS is revised sharply higher, it will be back to the old game of quietly - but surely - cutting estimates as we go through 2018.

Meanwhile, while so far most reporting companies have focused on the one-time tax charges associated with tax reform which negatively impact GAAP earnings, going forward more important than results will be commentary on tax reform's impact to EPS, and specifically how much will be retained, labor (whether or not it leads to wage inflation, and whether tax reform will boost wages/hiring or just more M&A and worker "synergies"), and spending (whether corporations will increase capex, M&A, R&D, or just do more buybacks and dividends payouts with repatriated and retained earnings).

Here BofA notes, that while a few of the early reporters were still working through the impacts and did not provide updated guidance/details, "we expect more details as earnings season progresses; several companies also indicated they will provide more clarity at upcoming Investor Days. Some early details have emerged from the 20+ S&P 500 companies that announced one-time bonuses, where a third also announced increased capex and about half announced higher wages."

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Comments

earleflorida Wed, 01/17/2018 - 18:00 Permalink

The 'horsefly in the ointment' is tomorrows [Trojan-horse`fly?]  (tonight [1/18/18] trading Shanghai 'INE') as in the "International Energy Exchange" opens for business in Oil Futures traded in YUAN (a unit of the Shanghai Futures Exchange.

***could [this] be a tempest in a teapot?*** 

Tomorrow, tomorrow... there's always tomorrow --- its only hours away?!? 

Jtrillian Wed, 01/17/2018 - 18:10 Permalink

I believe 2018 will be the year that reality catches up with the insanity.  If you are paying attention, it should be clear that it is already happening.

Unfortunately, I am very uncertain if any of us of us will survive what comes next.

MK ULTRA Alpha hotrod Wed, 01/17/2018 - 18:44 Permalink

Best bet for 2018 is cannabis production, the left wingers have increased use of cannabis as a measure to ride out Trump. It'll be over ten full years of cannabis usage growth. The added benefit of the resistance to Sessions increases profits as more federal sponsored raids and confiscations. Great advertisement and the price of cannabis increases.

Left wing and moderate citizens are smoking the Freedom Bowl. It's an accepted form of resistance. And with the increased availability of cannabis, the left believes the right will be converted by right wing cannabis usage, It won't change their right wing views because of Obama's race war, however, it will help with the political struggle on the issue of cannabis legalization.

In reply to by hotrod

Let it Go Wed, 01/17/2018 - 18:24 Permalink

Forecast can prove to be very wrong! Regardless of record new highs in the stock market and the positive predictions being made by the media, there is no guarantee as to how long the current growth trend will last.

Three major obstacles face America's future prosperity. America must confront and deal with its low job participation rate, exploding national debt, and the fact it is still a "high-cost producer" of goods which means jobs are not about to come rushing back because of the recently passed tax reform bill. More details can be found in the article below.

 http://Three Reasons America Faces A Difficult Economic Future.html