Economics

S&P 500 Energy, Materials, Tech Sectors See Highest Earnings Growth In 2017

As of today, the estimated earnings growth rate for the S&P 500 for calendar year 2017 is 9.6%. If 9.6% is the final growth rate for the year, it will mark the highest annual earnings growth for the index since 2011 (12.7%). All eleven sectors are projected to report year-over-year growth in earnings, led by the Energy, Materials, and Information Technology sectors.

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Earnings Growth

The Energy sector is expected to report the highest (year-over-year) earnings growth of all 11 sectors at 274.6%. At the sub-industry level, all six sub-industries in the sector are projected to report earnings growth: Oil & Gas Exploration & Production (N/A due to year-ago loss), Oil & Gas Drilling (N/A due to year-ago loss), Oil & Gas Equipment & Services (165%), Integrated Oil & Gas (118%), Oil & Gas Refining & Marketing (55%), and Oil & Gas Storage & Transportation (19%).

The unusually high growth rate for the sector is mainly due to unusually low earnings reported in CY 2016. On a dollar-level basis, the Energy sector is predicted to report earnings of $39.7 billion in CY 2017, compared to earnings of 10.6 billion in CY 2016. If the Energy sector were excluded, the estimated earnings growth rate for the remaining ten sectors would fall to 6.9% from 9.6%.

Earnings Growth

The Materials sector is expected to report the second highest (year-over-year) earnings growth of all eleven sectors at 23.3%. At the industry level, all four industries are projected to report earnings growth, led by the Metals & Mining (85%) and Chemicals (22%) industries. At the company level, DowDuPont is projected to be the largest contributor to earnings growth for the sector. However, the EPS estimate for CY 2017 reflects the combined DowDuPont company, while the EPS actual for CY 2016 reflects the standalone Dow Chemical company. This apple-to-orange comparison is the main reason DowDuPont is expected to be the largest contributor to earnings growth for the sector. If this company were excluded, the estimated earnings growth rate for the sector would fall to 11.6% from 23.3%.

The Information Technology sector is expected to report the third highest (year-over-year) earnings growth of all eleven sectors at 14.5%. At the industry level, all seven industries in this sector are projected to report earnings growth. Five of these seven industries are projected to report double-digit growth: Semiconductor & Semiconductor Equipment (39%), IT services (12%), Technology Hardware, Storage, & Peripherals (11%), Software (10%), and Electronic Equipment, Instruments, & Components (10%).

2017 Revenue Growth

The estimated (year-over-year) revenue growth rate for the S&P 500 for CY 2017 is 6.2%. If 6.2% is the final growth rate for the year, it will mark the highest annual revenue growth for the index since 2011 (10.6%). Ten sectors are expected to report year-over-year growth in revenues, led by the Energy, Materials, and Information Technology sectors.

Earnings Growth

The Energy sector is expected to reported the highest (year-over-year) revenue growth of all eleven sectors at 20.3%. At the sub-industry level, all six sub-industries in the sector are predicted to report double-digit revenue growth: Oil & Gas Equipment & Services (26%), Oil & Gas Refining & Marketing (23%), Integrated Oil & Gas (20%), Oil & Gas Exploration & Production (16%), Oil & Gas Drilling (14%), and Oil & Gas Storage & Transportation (13%).

This sector is projected to be the largest contributor to revenue growth for the S&P 500. If the Energy sector were excluded, the blended revenue growth rate for the index would fall to 5.0% from 6.2%.

The Materials sector is expected to report the second highest (year-over-year) revenue growth of all eleven sectors at 17.1%. At the industry level, all four industries in this sector are predicted to report revenue growth, led by the Chemicals (23%) and Metals & Mining (12%) industries. At the company level, DowDuPont is projected to be the largest contributor to revenue growth for the sector. However, the estimated revenues for CY 2017 reflect the combined DowDuPont company, while the actual revenues for CY 2016 reflect the standalone Dow Chemical company. This apple-to-orange comparison is the main reason DowDuPont is projected to be the largest contributor to revenue growth for the sector. If this company were excluded, the estimated revenue growth rate for the sector would fall to 7.8% from 17.1%.

The Information Technology sector is expected to report the third highest (year-over-year) revenue growth of all eleven sectors at 10.1%. At the industry level, six of the seven industries in this sector are predicted to report revenue growth. Three of these six industries are projected to report double-digit revenue growth: Internet Software & Services (23%), Semiconductor & Semiconductor Equipment (16%), and IT Services (11%).

Higher Global Exposure Creates Higher Earnings and Revenue Growth

It is interesting to note that the Energy (42%), Materials (47%), and Information Technology (60%) sectors have the highest international revenue exposures of all eleven sectors in the index. Thus, are S&P 500 companies with higher global revenue exposure expected to outperform S&P 500 companies with lower global revenue exposure in terms of earnings growth and sales growth for CY 2017?

The answer is yes. FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index) can be used to answer this question. For this particular analysis, the index was divided into two groups: companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure). Aggregate earnings and revenue growth rates were then calculated based on these two groups. The results are listed below.

Earnings Growth

The earnings growth rate for the S&P 500 for CY 2017 is 9.6%. For companies that generate more than 50% of sales inside the U.S., the earnings growth rate is 7.0%. For companies that generate less than 50% of sales inside the U.S., the earnings growth rate is 14.9%.

The sales growth rate for the S&P 500 for CY 2017 is 6.2%. For companies that generate more than 50% of sales inside the U.S., the sales growth rate is 5.1%. For companies that generate less than 50% of sales inside the U.S., the sales growth rate is 9.2%.

At the sector level, the Information Technology and Energy sectors are expected to be the largest contributors to earnings and revenue growth in CY 2017 for S&P 500 companies with more global exposure.

Article by John Butters. FactSet