Why Earnings Have Investors Feeling So Happy -- 2nd Update

Earnings at U.S. companies grew at the fastest pace in nearly six years in the first quarter, the latest boon to a bull market that has stretched into its ninth year.

With nearly all companies in the S&P 500 having reported results, aggregate earnings for the first quarter are on track to grow 13.6% from the year-earlier period, according to FactSet, the highest growth since the third quarter of 2011. The gains were broad, ranging from heavy-equipment maker Caterpillar Inc. to social network Facebook Inc. to regional bank U.S. Bancorp.

Beyond the jump in growth, many investors have been encouraged by signs that the quality of the results is improving. That contrasts with recent years, when investors worried that corporate share buybacks and ultralow interest rates were juicing stock gains in the absence of business improvement.

Fresh signs of corporate strength, alongside solid U.S. economic data and relative calm in financial markets this year, have helped send the S&P 500 up 7.4% through Wednesday.

"We should have continued growth in the markets, a lot of it driven because we have a stable economy and solid corporate earnings," said Omar Aguilar, chief investment officer at Charles Schwab Investment Management. "That gives me reason to be more optimistic."

Sales are picking up after many companies had turned to reducing costs and delaying investments in infrastructure to boost profits through the recovery from the financial crisis. Revenues are expected to grow by 7.7% from the year-earlier period, according to FactSet, the highest rate since the fourth quarter of 2011. Sixty-four percent of companies beat analysts' expectations for revenue for the latest quarter, according to analysis from FactSet, above the five-year average of 53%.

Companies also are spending less to repurchase their own shares this year, easing some investors' concerns that buybacks have been pumping up earnings growth. Share repurchases among firms are tracking 18% lower than a year ago and 1.4% lower than the fourth quarter of 2016, according to S&P Dow Jones Indices data as of Wednesday.

Buybacks push up per-share earnings, which can make the shares that remain on the market more valuable. But they also have been criticized by investors who see them as a way for companies to prop up share prices in the short term at the expense of focusing on investments that drive longer-term growth.

Ten of the 11 sectors in the S&P 500 are on track to post quarterly earnings growth in the first quarter, with financial and technology companies reporting among the biggest improvements, according to FactSet.

Bank of America Corp.'s first-quarter profit jumped 40% from a year earlier, surpassing analysts' expectations, as trading revenue jumped and rising interest rates boosted its net-interest income -- a key measure of lending profitability. Shares of the bank are up 5.7% in 2017.

Facebook's first-quarter profit surged 76% to $3.06 billion, as advertisers spent more money on its platforms and the company's number of active users continued to rise. Its shares have jumped 30% this year.

"When we look at how earnings came in this quarter and how they're expected to come in the rest of the year, people's concerns about the stock market should really be allayed," said Jonathan Golub, chief equity strategist at RBC Capital Markets.

S&P 500 companies have now posted earnings growth for three straight quarters, after five consecutive quarters of declines, according to FactSet. The rebound is expected to continue. Analysts polled by FactSet estimate the broad index will post earnings growth of 6.8% for the second quarter and 11% for the full year.

Much of that is because a prolonged slump in commodities prices eased at the end of last year. About a third of the S&P 500's earnings growth in the first quarter came from energy companies, according to FactSet, where results improved alongside oil prices, which sank to their lowest levels in more than a decade in early 2016.

Last month, Exxon Mobil Corp. reported its best quarterly results since 2015, more than doubling its profit from the first three months of 2016, while Chevron Corp. posted a first-quarter profit of $2.7 billion, compared with a loss of $725 million in the year-earlier period.

However, shares of both companies are down this year as sliding oil prices have pressured energy stocks anew, highlighting the fragility of the recovery. In addition, this year's earnings gains reflected in part weak performances for many sectors in the year-earlier period.

Also, some worry that this year's stock rally could stumble if economic measures -- including U.S. auto sales -- that disappointed in the first few months of the year show continued weakness.

"I see some danger signs for growth moving forward," said Ed Keon, managing director and portfolio manager with QMA, a multiasset manager owned by Prudential Financial, who added that he has pulled back from U.S. stocks this year while shifting more money into their European counterparts.

Still, Mr. Keon said he doesn't see an end to the bull market soon. The most recent earnings season was "clearly exceptional," Mr. Keon said, and should help stocks keep climbing in the near term.

--Ben Eisen contributed to this article.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

May 24, 2017 16:43 ET (20:43 GMT)