The picture emerging from the Q4 earnings season is one of all around strength and momentum. Not only is an above average proportion of companies beating top- and bottom-line expectations, but estimates for the current period are materially going up. With results from 26% of the S&P 500 members already out and another 24% on deck to report results this week, we will be at the halfway mark by the end of this week.

It is still early going for the small-cap S&P 600 index, with results from only 14% of the index’s members out.

Of the roughly 400 companies reporting results this week, including 121 S&P 500 members, the most notable reports are:

McDonald’s (MCD - Free Report) – The fast giant reports Q4 results before the market’s open on Tuesday January 30th. The company is expected to earn $1.59 per share on $5.26 billion in revenues, which compares to $1.44 in EPS and $6.03 billion in revenues in the year-earlier quarter. The company’s operating and stock-market performance has been very impressive lately, with the stock up a +46.4% in the past one year, outperforming the Zacks Restaurant industry’s +21.7% gain and the S&P 500 index’s +24.2% gain

Boeing (BA - Free Report) – Boeing reports Q4 results before the market’s open on Wednesday, January 31st. The company is expected to earn $2.91 per share on $24.83 billion in revenues, up +17.8% and +6.6% from the year-earlier period, respectively. Boeing is a beneficiary of the strong global commercial aviation market as well as the expectation of increased U.S. government defense spending. The momentum in Boeing shares over the past year has been very strong, with the stock up +102.8%, and playing a major role in pushing the Dow Jones Industrial Average into record territory.

Facebook (FB - Free Report) – The social-media giant reports Q4 results after the market’s close on Wednesday, January 31st. The company is expected to earn $1.94 per share on $12.56 billion in revenues, up +37.6% and +42.6% from the year-earlier period, respectively. The company’s ever-growing tally of daily active users will be of as much importance to the market, as its top- and bottom-line results. The expectation is that the worldwide tally of daily active users increased to 1.414 billion, up from 1.227 billion in the year-earlier quarter and 1.368 billion in the preceding quarter. The impact of recent newsfeed changes on ad revenues will likely be of interest on the earnings call. The stock is up +7.7% since the start of the New year and +43.8% over the past year, outperforming the Zacks Tec sector’s +28.1% gain over the past year.

Alibaba (BABA - Free Report) and Amazon (AMZN - Free Report) – Alibaba reports before the market’s open on Thursday, February 1st, while Amazon reports after the market’s close that day. As impressive as Amazon’s stock market performance over the past year has been, Alibaba has done even better, with the stock up +101% over the past year, better than Amazon’s +67.7% gain. Amazon has long ‘trained’ the market on not to look for earnings performance in its quarterly results and that will likely be case this time around.

The key factor will be overall revenues and performance of the company’s cloud business – Amazon Web Services (AWS). With respect to revenues, the current Zacks Consensus expectation is $59.98 billion, which represents +37.1% growth from the year-earlier level, while earnings of $1.85 per share would represent a +20.1% year-over-year gain.

Apple (AAPL - Free Report) - Apple reports Q4 results after the market’s close on Thursday, February 1st. The company is expected to earn $3.81 per share on $86 billion in revenues, up +13.4% and +9.8% from the year-earlier period, respectively. Apple makes plenty of products, but the most important product in its portfolio is the iPhone, whose unit sales are expected to have reached 79.8 million in the quarter, up from 78.29 million in the year-earlier quarter and 28.85 million in the preceding quarter. The stock has lost ground in recent days, but it is up +40.5% over the past year, handily outperforming the broader Tech sector.

Alphabet (GOOGL) – Thursday evening is very busy on the reporting calendar, with Alphabet also coming out with its quarterly results at the same time as Apple and Amazon. The search giant is expected to earn $10.12 per share on $25.67 billion in revenues, up +8.12% and +20.99% from the year-earlier period, respectively.
The stock has literally been on a tear in January, up +12.7% year-to-date, bring its performance of the past year to +40.6%.

Q4 Earnings Season Scorecard (as of Friday, January 26, 2018)

Total earnings for the 133 S&P 500 members that have reported results already are up +12.3% from the same period last year on +8.8% higher revenues, with 81.2% beating EPS estimates and 78.9% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 65.4%.

To put these results in a historical context, the charts below compare the results thus far with what we had seen from the same group of 133 index members in other recent periods.

Any way you look at these results, the Q4 earnings season is on track to be very good. Not only is growth tracking above what we had seen from the same group of 133 index members, but a record proportion are beating EPS and revenue estimates.

The comparison charts below highlight the very strong revenue momentum that’s coming out of the Q4 earnings season, a truly impressive performance.

Expectations for Q4 As a Whole

Total Q4 earnings are expected to be up +11.6% from the same period last year on +7.5% higher revenues. This would follow +6.7% earnings growth in 2017 Q3 on +5.9% growth in revenues.

The table below shows the summary picture for Q4, contrasted with what was actually achieved in Q3.

The chart below shows Q4 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to pick up in Q4 after dipping in the preceding quarter and continue accelerating going forward.

Estimates Keep Going Higher

I want to touch on the favorable revisions trend for the current and coming quarters at present. Regular readers will recall that estimates for the Q4 earnings season had held up unusually better in the run up to the start of this earnings season. But what we are witnessing with estimates for the current and following quarters is extremely positive.

The typical pattern over the last few years has been that estimates for the quarter will start coming down as we will get closer to the reporting season for that quarter. The opposite is the case with the current (and following) quarter(s), with estimates starting to go up in a notable way. You can clearly see this in the evolving earnings growth expectations for 2018 Q1, as depicted in the chart below.

Taxes are a direct contributor to this positive revisions trend, but there appears to be favorable momentum on the revenue front as well, as the chart below shows.

Mind the Gap

As we have been pointing out all along, the one doubt over the ‘quality’ of the picture coming out of the Q4 earnings season is the extremely wide gap between adjusted earnings and GAAP earnings.

For the 133 S&P 500 members that have reported Q4 results already, as of Friday, January 26th, the magnitude of gap between adjusted earnings and GAAP earnings is unlike anything we have seen over the last few years.

On average, adjusted earnings were +12% higher than GAAP earnings over the preceding 16 quarters for these 133 S&P 500. But as you can see in the chart below, the gap is extremely wide for 2017 Q4 and likely to remain in record territory even as the reporting cycle moves beyond the Finance sector where the issue was very pronounced.

A lot goes into ‘earnings quality’. But as a general rule, it is reasonable to be wary of big variance between adjusted and GAAP earnings. Going by this simple rule, you have to question the ‘quality’ of Q4 earnings reports, irrespective of the growth pace and proportion of positive surprises on the ‘adjusted’ earnings front.

The Small-Cap Scorecard

For the S&P 600 index, we now have Q4 results from 84 index members or 14% of the index’s total membership. Total earnings for these 84 index members are up +15% from the same period last year on +13.1% higher revenues, with 61.9% beating EPS estimates and 59.5% beating revenue estimates.

The charts below compare the results thus far with what we had seen from the same group of 84 index members in other recent periods.

The table below shows the blended picture, combining the actual results that have come out with estimates for the still-to-come companies, for Q4 for the small-cap index.

The chart below puts the small-cap index’s expected Q4 performance in the context of where growth has come from and where it is expected to go in the coming quarters.

Here is a list of the 396 companies including 121 S&P 500 and reporting this week.