market firms, which make up the bulk of the sector.
Estimates for financials have also been among the most resilient during earnings season, reflecting the favorable environment noted above and prospects for deregulation.
Observation #5: Industrials Expectations May Have Gotten Too Low
The industrials sector has struggled with low growth rates, shortfalls relative to expectations, and reductions in guidance over the past year or so. The sector has been a victim of the two biggest drags on earnings during this time: the strong U.S. dollar and the oil downturn. These two drags have reversed meaningfully, which may have finally enabled the industrials sector, with its significant commodity-sensitive businesses and high overseas exposure, to finally meet its growth expectations.
The upside the sector has generated during earnings season (2.7%) is solid, but perhaps more impressive is that first quarter 2017 estimates for the sector have risen 2.1% since January 1, 2017, while sector estimates for all of 2017 have hardly budged [Figure 5]. We believe this resilience reflects overly pessimistic expectations and optimism surrounding a potential infrastructure spending program later this year or in 2018.
Conclusion
Fourth quarter earnings season has not been a blowout by any stretch, but growth rates have been solid and have put the earnings recession further in the rear view mirror. Although much of the talk has been about potential policies out of Washington, D.C., there have been many other things to discuss, including resilient guidance, strong profit margins, and noteworthy results from the financials and industrials sectors. Look for more on earnings from us in our Corporate Beige Book commentary in two weeks on March 6, 2017.
