Earnings aren’t the market’s focus at present; the tax legislation currently moving towards a passage in Congress tops everything else. The legislation promises many substantive changes in a number of areas, but it will have a big impact on corporate profitability as well, all of it positive.

The exact earnings impact of the tax legislation will become clear once it is signed into law, but preliminary estimates suggest a material earnings boost. S&P 500 earnings in 2018 are already expected to be up +11.7%, with the growth pace expected to roughly double as a result of the tax legislation. As meaningful as this impact on S&P 500 earnings is, it is far more pronounced for small-cap companies.

We will start seeing this in rising earnings estimates following the completion of the legislation. But we need to be mindful that the estimate revisions trend for Q4 has already been the most favorable relative to last many years. What this means is that the 2017 Q4 estimate revisions trend is unlike any other recent comparable period, with the earnings growth rate for the quarter actually inching up a bit since the quarter got underway.

You can see this trend in the chart below, as it shows the evolution of Q4 earnings growth expectations since the start of the quarter.

Estimates for 8 of the 16 Zacks sectors have come down, while the other half experienced positive estimate revisions. The Conglomerates, Consumer Discretionary and Transportation sectors have suffered the most notable negative revisions while the notable positive revisions have taken place in the Energy, Basic Materials, Industrial Products and Technology sectors. The most pronounced positive revisions have taken place in the Energy sector, reflecting developments in oil prices. On an ex-Energy basis, the Q4 earnings growth rate is modestly below the +8.6% rate at the start of the quarter.

We haven’t seen this type of revisions trend in recent years, but this trend will likely become the norm once the tax legislation gets enacted.

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