Tech, last year’s stalwart, is expected to post earnings and revenue growth of 16 percent and 11 percent, respectively, Tech stocks rose 37 percent in 2017, easily outperforming the broader market.
The lofty expectations come at a time when the U.S. economy appears to be firing on all cylinders. It grew by more than 3 percent in the second and third quarters of last year. The New York Federal Reserve expects the economy to have grown by nearly 4 percent in the fourth quarter, according to the bank’s Nowcast tool.
They also come after three quarters of strong profit growth. S&P 500 earnings rose 15.5 percent and 10.8 percent in the first and second quarters, respectively. Third-quarter earnings grew by 7.1 percent.
“The fundamentals remain intact,” said Lindsey Bell, investment strategist at CFRA. “You’re getting momentum in the economy” and “you’re getting synchronous economic growth around the world, which is a bonus.”
But there is one potential risk that could put a sour note on this earnings season: companies’ guidance.
“The guidance going forward is going to be important, especially what [companies] say about tax reform,” said John Butters, senior earnings analyst at FactSet.
President Donald Trump signed a bill last month that slashed the corporate tax rate to 21 percent from 35 percent. Wall Street was betting on a lower tax rate for companies, pushing equities higher throughout 2017.
“Around tax, we expect sizeable charges for taxes on multinational offshore earnings, with guidance overall likely to be somewhat conservative given the desire to set a beatable bar for 2018,” said UBS’ Parker.
Still, FactSet’s Butters expects the lower tax rate to be a positive for companies, saying, “It’s going to be a strong earnings season.”