RPT-Wall St Ahead-Strong Week Sales in the US Could Mitigate Profit Concerns in 2019

(Repeats the story of Friday.)

By Caroline Valetkevitch

NEW YORK, Sept 7 (Reuters) – US investors worried about the effect of corporate tax cuts for next year should worry about US revenue growth.

S & P 500's revenue growth, which reached 9.5% in the second quarter, its fastest pace since 2011, is estimated at 8.2% for 2018, according to Thomson Reuters data. .

While this growth is expected to slow to 5% next year, it is still at the peak of the historical average. The decline is not as strong as is expected for earnings growth, which received a strong boost this year from the law on cuts and tax jobs that reduced the tax rate of companies.

This could ease some investors' concerns about earnings growth, which is reaching its peak for the cycle this year, as risks related to pricing, rising interest rates and strengthening the US dollar increase.

"Revenue growth outweighs all our earnings concerns," said Sameer Samana, global and technical equity strategist at Wells Fargo Investment Institute in St. Louis.

"Of course, earnings growth is maximum. We had tax cuts, "he said. "We want to see sustainable earnings growth driven by revenue, which is exactly what we are seeing now."

Revenue gains are driven by strong demand for economic growth, with gross domestic product growing at an annualized 4.2% in the second quarter, the fastest in almost four years.

The strength of the labor market is at least partly due to the strength of the US labor market, while capital spending is also contributing to growth, said Bucky Hellwig, senior vice president of BB & T Wealth Management in Birmingham , Alabama.

Figures released on Friday show that wages in August recorded their largest annual increase in nine years, suggesting that consumer spending will remain strong.

Rising wages may become a bigger risk for earnings at some point, but that may not happen before 2020, said Patrick Palfrey, vice president and equity strategist at Credit Suisse Securities in New York.

"Right now, the story of income is a story of revenue. This really allows companies to continue to generate this growth, and it will be able to offset any cost increases due to higher costs, "said Mr. Palfrey.

Most economists polled by Reuters at the end of August were expecting economic growth to approach the recent four-year high in the coming quarters, but it was still likely to experience a recession. over the next two years.

The tax reduction program, the largest revision of the US tax code for more than 30 years, led to an increase in profits, which culminated later in the earnings cycle, according to strategists.

Analysts predict S & P 500 earnings growth of 23.3% in 2018 – the strongest annual growth since 2010 – and 10.2% in 2019, according to Thomson Reuters data.

Earnings rose about 24.9% in the second quarter from a year earlier, and analysts expect growth of 22.3% in the third quarter, according to Thomson Reuters data.

Strategists believe that results can continue to increase even after growth peaks.

For example, S & P 500 earnings growth reached a peak in the fourth quarter of 2003, but remained in the double-digit range at least three years later, while revenues remained well above the trend of the first quarter. same period. , an independent research firm.

Over the last 80 years, S & P 500's earnings growth has averaged 6 to 8 percent a year, he said, while sales have increased by around 3 to 5 percent .

"Early indications show that it looks like 2003, where we could see growth above the trend persist longer than expected," said Raich. "When you have this type of revenue growth, companies can increase earnings growth above the trend." (Caroline Valetkevitch report, edited by Alden Bentley, Rosalba O'Brien and G Crosse)