A modest recovery in U.S. corporate profits is under way after a downturn early last year. But it’s going to take this week’s flurry of earnings announcements from corporate heavyweights to give investors a better idea of whether the stock market’s stretched valuation is justified.scyther5/Getty Images/iStockphoto
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A modest recovery in U.S. corporate profits is under way after a downturn early last year. But it's going to take this week's flurry of earnings announcements from corporate heavyweights to give investors a better idea of whether the stock market's stretched valuation is justified.
More than 150 companies within the S&P 500, a remarkable 30 per cent of the benchmark index, will report their fourth-quarter results this week.
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These companies include Visa Inc., Pfizer Inc., Exxon Mobil Corp., Amazon.com Inc., Apple Inc. and Facebook Inc., which represent many of the key sectors within the U.S. economy.
The financial results follow a big move in global stocks that pushed the Dow Jones industrial average above the 20,000-point threshold last week for the first time.
The blue-chip index has risen more than 12 per cent since November.
The broader S&P 500 is near record-high territory, and Canada's S&P/TSX composite index is close to a new high.
The gains come amid expectations that the new U.S. government will bolster economic growth in the near term with new trade agreements, relaxed regulations and additional government spending.
But the market's gains have raised valuations to historically high levels, putting pressure on companies to show upbeat results after a downturn in profits last year triggered a brief, but scary, market correction at the start of 2016.
Now, with stocks exploring new highs, the price-to-earnings ratio for the S&P 500 is above 21, up from just 14 in 2012, according to Bloomberg. In other words, stock prices have been rising a lot faster than profits, which is unsustainable.
The index is similarly pricey relative to corporate sales, raising concerns that the nine-year bull market in stocks could stall unless strong financial results pour in.
So far this earnings season, companies have been exceeding analysts' expectations with modest growth over all.
For the 170 companies in the S&P 500 that have reported their fourth-quarter results, profits are up an average of 4.4 per cent, year-over-year.
According to Bloomberg, the index could report its best quarterly growth since September, 2014.
The calendar is lighter in Canada next week, where companies in the S&P/TSX composite index are still struggling to gain some momentum after weak crude oil prices decimated profits last year.
Telecom giant BCE Inc. and cheese maker Saputo Inc. will report their respective quarterly results on Thursday.
Expectations are high: A consensus of analysts estimates that BCE will report a profit of 78 cents a share, after one-time adjustments, or 8.3-per-cent higher than last year.
For Saputo, analysts expect profit will rise about 16 per cent, to 51 cents a share.
But the focus will surely centre on U.S. behemoths.
Apple, which reports on Tuesday, is looking like the potential highlight of the week. The company has been in a slump recently, reporting three straight quarters of declining profits and revenues amid weaker demand for its iPhones.
Analysts expect that the losing streak will continue: Their consensus profit estimate of $3.22 (U.S.) per share is 1.7 per cent below last year's result.
The good news? The decline would be relatively mild next to sharper downturns in the previous three quarters.
As well, analysts expect that sales will rise 2 per cent as loyal Apple consumers start to upgrade their older-model iPhones.
Apple's share price, much like the broader stock market, has been reflecting some of this renewed optimism. The shares, which fell more than 30 per cent between mid-2015 and mid-2016, have rebounded nearly 35 per cent over the past eight months.
Facebook and Amazon.com will also get a lot of attention, given the two companies' record of strong growth.
Analysts expect that Facebook, which reports on Wednesday, will report an adjusted profit of $1.31 a share, up 65 per cent over last year. Sales should rise more than 45 per cent, to $8.5-billion. Amazon.com is expected to report a profit of $2.68 a share, up 47 per cent, and sales of $44.6-billion, up 25 per cent.
Expectations are high, and so is the market.