Profit growth pickup could justify Wall Street rally

Mon Jan 16, 2017 6:25am EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. companies are set to report their strongest profit growth in two years, which could go a long way toward justifying Wall Street's record-breaking rally, say stock investors who anticipate many companies will top expectations.

Fresh from a year-long decline in quarterly profits, companies in the benchmark S&P 500 .SPX are expected to report their bottom lines grew by 6.2 percent in the fourth quarter, the latest Thomson Reuters data shows, the strongest growth since a 7.0 percent increase in the same quarter of 2014.

By most measures, the last quarter was a solid one for the wider U.S. economy. One key measure of health of the manufacturing sector, the Institute for Supply Management's (ISM) monthly purchasing managers' index, recently hit its highest level in two years, and the global economic outlook has improved as well.

At the same time, the number of fourth-quarter corporate outlooks above analysts' expectations is at the most they have been in years.

As a result, some strategists say, investors may see a larger-than-usual number of companies posting results that beat Wall Street's estimates in the weeks ahead.

"There's actually some positive momentum here in the fourth quarter. ... Wouldn't it be logical to assume that you'd also see that coming through in your corporate activity?" said RBC Capital Markets Chief Equity Strategist Jonathan Golub, who thinks current profit estimates do not fully reflect the economic improvement.

Results also will benefit from "easy comparisons" with year-ago numbers, said Richard Bernstein, chief executive and chief investment officer of Richard Bernstein Advisors in New York.

To view a graphic on S&P 500 profit growth rates and guidance, click   Continued...

A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly