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Two big questions hung over corporate America late last year as strong earnings powered stocks. Could consumer and business confidence stay high, and how would Washington's tax reforms boost companies' coffers?
Now with earnings season almost at an end, we have some answers. It's clear that business is good. Thomson Reuters says the average S&P 500 company saw earnings jump 15% in the fourth quarter. And even revenue growth was well above recent trends at 8.2%.
The big winners were energy, materials, and tech companies. Consumer companies were a bit below average, while the only sector to see earnings shrink was real estate, which is sensitive to rising interest rates. But the main message was that US CEOs are confident that growth will continue above its recent trend.
Now tax reform plays a big part in that. The package Donald Trump signed before Christmas didn't benefit every business. But Goldman Sachs thinks that companies' cash spending is now going to go up 15% this year to $2.5 trillion. Just over half of that will be invested in growth, things like capital expenditures and research and development that are exactly what the White House said it wanted to stimulate. But more than a trillion dollars looks likely to flow straight into shareholders' pockets in the form of dividends and share buybacks. Goldman thinks R&D spending will grow by a healthy 10% this year, but spending on buybacks will rocket by 23%. That should help earnings for some quarters to come, even if it's not been enough to sustain stock markets' record run.
