Wall Street is set up for an abnormal earnings season

Kai Pfaffenbach/Reuters

• For the fourth quarter of last year, Wall Street analysts made the smallest cuts to their estimates of any quarter since 2010, according to FactSet.
• Analysts across sectors are counting on a strong earnings season, raising the bar that companies have to clear in the coming weeks.
• Q4 is especially important because it was the last reporting season before the new tax law kicked in.

Wall Street analysts have set the bar high for corporate America when it starts reporting earnings later this week. Or at least, their expectations aren’t as low as they usually are.

In the fourth quarter, analysts who forecast earnings metrics for the S&P 500 companies they cover made the smallest cuts to their estimates of any quarter since 2010, according to FactSet.

They lowered the bottom-up earnings-per-share estimate by 0.3%, to $34.90 from $35. That’s smaller than the average quarterly decline during the past year (-3.1%) and during the past five years (-4.2%), according to FactSet’s data.

FactSet

The overall estimate was not skewed by one or two sectors in which analysts are uniquely bullish. John Butters, a senior earnings analyst at FactSet, noted that analysts in seven out of the 10 S&P 500 sectors made cuts that were smaller than the five-year average.

A big contribution to the S&P 500’s fourth-quarter earnings growth, however, should come from the energy sector, as it continues to rebound from the oil crash of 2014. Credit Suisse estimates 126% earnings-per-share growth from Q4 2015, which dwarfs second-place Materials by about 100 percentage points.

Wall Street’s confidence means companies may have a higher bar to beat in the coming weeks. Every quarter, there’s a familiar pattern: Expectations for earnings growth plunge into the reporting season. Companies end up beating these lowered expectations, giving investors more reason to bid up their share prices.

And across Wall Street, analysts are counting on earnings growth to keep this bull market going for longer.

The last ‘apples-to-apples comparison’

That aside, this earnings season marks the end of an era.

That’s because the fourth quarter was the last one before the most drastic changes to the US tax code in three decades.

“Given recent tax changes, 4Q17 provides the last apples-to-apples comparison for company results under the prior regime, and will therefore be of particular importance,” Jonathan Golub, the chief US equity strategist at Credit Suisse, said in a note on Monday.

Over the next couple of weeks, analysts will be paying attention to guidance around each company’s new effective tax rate as they make their final estimates for this year, Golub said. Additionally, they’ll be listening out for details from companies on how they plan to spend capital returned from outside the US.

The fourth-quarter earnings season unofficially kicks off Friday when JPMorgan and Wells Fargo announce their results.