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Large Cap Growth

Large Cap Commentary – April 2018

15 May 2018

As we close out the first third of the year, the S&P® 500 Index is in negative territory, although only slightly. One of the adages in investing is that price follows earnings. If earnings fall, a stock should be worth less – pretty elemental and intuitive stuff. A quick thought may be that recent corporate earnings, which have been announced throughout much of April, must have disappointed. Results for the first quarter 2018, however, contradict that assumption. Indeed, according to Thomson Reuters, after-tax earnings were on pace to rise over 25% from a year ago. That represents the seventh straight quarter of per-share earnings growth and the strongest quarterly gain in more than seven years.

One of the reasons for that jump in earnings is due to the change in tax policy instituted last year. According to the Wall Street Journal, more than half of the combined net income growth reported by the 200 largest public companies stemmed from the cut in corporate taxes. In fact, for a full third of companies that have reported, their tax expense fell even as their income rose. A skeptic might latch onto that and rightly claim that the bump in earnings from the new tax rate is a one-time event. That is true.  However, the benefit from lower taxes extends into perpetuity.

In addition, looking more closely at results reported so far, sales for companies within the S&P 500 Index are expected to rise over 8% year-over-year, the same rate posted in the fourth quarter of 2017. That would mark the seventh straight quarter of sales growth and the highest growth rate seen since coming out of the Great Recession in 2011. Sales were not affected by changes in tax policy, perhaps giving a truer representation of the strength of Corporate America.

Still, investors this year have not embraced what appears to be compelling results. One of the explanations given is that this is as good as it gets. If the tax bump gift is one-time in nature and we have already booked the first quarter of 2018, then we have only three more quarters of bump, before we hit … slump.  There is probably some truth to that, as no one expects the kind of earnings growth we are seeing today to extend into 2019.

Another concern weighing on investors’ minds is the heightened discussion over tariffs and the potential for trade wars. We wrote about that last month. Potential changes in U.S. trade policy increase uncertainty for investors, and increased uncertainty generally depresses stock valuations.

How this all plays out is an unknown, but flat to weak markets always present opportunities. Thus, in the midst of this new uncertainty we will look for companies that have been unduly punished to add to our portfolio. With the backdrop of better earnings, higher sales and lower valuations, we remain very positive about the prospects for stocks for long term investors.

We have four successful equity strategies – Large Cap, Small Cap, Dividend Select and the recently introduced Mid Cap. We are very proud of all, and if you have questions on any of these, or know others who might have an interest in our strategies and mailings, please call us.

Ken Crawford

Senior Portfolio Manager

Past performance is no guarantee of future results. Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities within these sectors were or will be profitable. A list of stocks recommended by Argent in the past year is available upon request.