C.J. Lawrence Weekly – Technology Continues to Deliver

The 4Q17 earnings season for the S&P 500 is 91% complete and the results, to date, are impressive. Earnings per share for the S&P 500 are coming in 14.7% ahead of last year’s level. 72% of reporting companies have delivered earnings results that were ahead of analyst expectations, a 5-year high for positive earnings surprises. Tax reform and other GAAP related earnings adjustments have created some cloudiness and debate around the headline numbers, making pure “operating results” less clear. But revenue results, on the other hand, can provide an unadjusted view of business progress. FactSet reports that, to date, 77% of reporting companies have delivered better-than-expected revenue results for the quarter, the highest positive revenue surprise reading since FactSet began compiling the data in 2008.

To date, S&P 500 revenues are coming in 8.2% ahead of last year’s level. If that figure holds, as the remaining constituents report, it will mark the highest sales growth rate since 3Q11. Currently all eleven sectors are posting positive revenue comparisons, with leadership being provided by Energy, Materials and Technology. They are up 20.3%, 20.1%, and 13.4% respectively, versus 4Q16. A rebound in oil prices helped boost energy company top lines, while rising product prices supported major and specialty chemicals sales. Materials sector sales have also been aided by the addition of E.I. DuPont de Nemours’ revenue results to Dow Chemical’s revenue line, post-merger. Without the combination, the Materials sector top line would be up 12% from the prior year.

Once again, the Technology Sector is delivering strong top line results. It has been the most consistent producer of revenue growth among all sectors, over the past fifteen years. In fact, Technology has had only one down year for revenues (-4.0% in 2009) during the period. 2017 sector revenues will likely come in 10.2% higher than 2016. Leading the way, within the sector, are the Internet Software and Services group and the Semiconductor and Semiconductor Equipment group, which are on track to deliver 25% and 18% year/year top line growth for 4Q17. Analysts surveyed by FactSet are looking for continued outperformance from the sector with revenues forecasted to grow another 10% in 2018 and 7% in 2019. Over time, sectors, groups, and individual companies that have been successful at generating consistent and meaningful revenue growth have outperformed the broader market. The technology sector continues to exhibit these characteristics, thus warranting a meaningful overweight position in growth portfolios, in our view.

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