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U.S. Equity Strategy Summary

Core Content

This report provides an analysis of the U.S. equity market and its performance in the fourth quarter of 2017 (4Q17), with a focus on earnings growth, shareholder returns, and comparisons with global markets. It also outlines the methodology and disclosure information related to Credit Suisse's research and analyst ratings.

Main Points

• Last Apples-to-Apples Comparison: 4Q17 is noted as the last quarter with an apples-to-apples comparison for company results under the previous tax regime, making it particularly significant for analysis.

• Analyst Forecasts: Analysts have adjusted their 2018 forecasts by less than 2% due to recent tax changes, indicating that the impact of these changes has not yet fully materialized. Investors will closely watch guidance on new effective tax rates, capital redeployment, and the effects of increased buybacks and dividends.

• Shareholder Return of Capital: In 2017, companies returned less capital to shareholders, with dividend yields falling to 1.8% and buybacks contributing less to EPS growth. These trends are expected to reverse in 2018 due to stronger after-tax cash flows and repatriated overseas cash.

• EPS Growth Expectations: 4Q17 EPS growth is projected to be between 14-15%, assuming a typical pace of earnings beats. The consensus projection is for 11.5% growth.

• Early Reporters: Cyclicals have shown strong early results, with revenue and earnings surprises. The ISM readings suggest a higher likelihood of earnings beats in 4Q17.

• Sector Performance: The report includes a detailed breakdown of EPS and revenue growth across various sectors, such as Energy, Financials, and Technology. It highlights that the U.S. market is expected to outperform EAFE in terms of EPS growth.

• Global Comparisons: EAFE is projected to have modest growth compared to the U.S., with certain regions like the United Kingdom and Asia/Pacific ex-Japan showing strong performance. The U.S. market has a higher EPS growth rate than EAFE.

• Dividend and Buyback Trends: The S&P 500 currently has a lower yield than Treasuries and EAFE, suggesting that U.S. stocks may become more attractive as shareholder return trends reverse.

Key Information

• Analysts: Jonathan Golub, Patrick Palfrey, Manish Bangard, Dana Nentin, and Erica Cid are the research analysts involved in this report.

• Rating Definitions:

  • Outperform (O): Expected total return to outperform the relevant benchmark.
  • Neutral (N): Expected total return to be in line with the relevant benchmark.
  • Underperform (U): Expected total return to underperform the relevant benchmark.
  • Restricted (R): Certain restrictions apply due to legal or regulatory reasons.
  • Not Rated (NR): No investment rating or view is provided.
  • Not Covered (NC): No ongoing coverage is provided.

• Sector Weightings:

  • Overweight: Positive expectations for the sector's fundamentals and/or valuation.
  • Market Weight: Neutral expectations.
  • Underweight: Cautious expectations.

• Research Disclosures:

  • Credit Suisse provides research reports through its proprietary portal, CS PLUS.
  • Analysts may participate in events hosted by subject companies but do not accept travel reimbursements.
  • Certain securities may have restrictions based on jurisdiction.
  • The report does not provide tax advice and does not guarantee principal.

Analyst Certification

• Jonathan Golub, CFA, certifies that the views expressed in the report reflect his personal views and that his compensation is not directly or indirectly related to the recommendations or views in the report.

Legal and Regulatory Notes

• Credit Suisse's research is impartial, independent, clear, fair, and not misleading.
• The report does not contain tax advice and is not intended to be used for tax avoidance purposes.
• Credit Suisse has no business relationships with companies involved in anti-personnel mines and cluster munitions.

Data Sources

• The report uses data from Standard & Poor's, Thomson Financial, FactSet, and MSCI.
• All data is indexed to 100 on September 30, and historical trends are based on data from 2011-2016.

Summary of Growth Expectations

• 4Q17 EPS Growth: Expected to be between 14-15%.
• Historical Growth: Revenue and EPS growth have been more robust in recent quarters.
• Global Comparisons: EAFE is expected to modestly outpace the U.S. in certain areas, but the U.S. is projected to be a standout quarter in terms of EPS growth.

Conclusion

The report emphasizes the importance of 4Q17 as a pivotal quarter for assessing the impact of recent tax changes on company results. It suggests that U.S. stocks may become more attractive due to reversing capital return trends, and that EPS growth is expected to exceed historical averages. The report also outlines the methodology for analyst ratings and provides important legal and disclosure information.