Strong performance in the last two quarters of 2016 offset weakness during the first half of the year. While at this time last year our S&P 1500 financial scorecard was covered with red ink (as in declining trends), late-year results helped stabilize the scorecard, which also reveals some notable improving trends. Now the economy seems poised for accelerated growth, but not without risk.
The presidential election’s immediate impact on the economy was well documented in our last quarterly pay-for-performance update for the S&P 1500, pointing out record-breaking index values and rising expectations for 2017. (For more details of our last analysis, see “Third quarter pay-for-performance update for the S&P 1500: Will the economy become great again?,” Executive Pay Matters, December 19, 2016.)
Figure 1 shows how total shareholder returns (TSR) in 2016 differed by market capitalization since the election. Clearly, the expected policies of the new administration were well received by investors, as stock returns for the final two months of the year were generally equal to or better than the prior 10-month period. Double-digit full-year returns were enjoyed by all three indices, and small-cap companies fared particularly well in the post-election period.
Figure 1. 2016 total shareholder return
With year-end financial results available, we can now tally the 2016 financial scorecard and review expectations for 2017. Figure 2 shows median financial results among the S&P 1500 over the past three years and notes the trend from 2015 to 2016. The results reflect low single-digit growth, a mixed bag in the balance sheet, less than stellar cash flow results, yet strong stock valuations and shareholder returns. This reminds us that the stock market looks forward, i.e., to 2017 and beyond. This is an important reminder when thinking about pay-for-performance alignment because most bonus plans and a sizable portion of long-term incentive plans pay based on past financial performance. In our next update, we’ll examine how these performance results affected 2016 incentive/bonus payouts.
Figure 2. 2016 S&P 1500 scorecard
Turning to 2017, investors are growing bullish at the potential for tax cuts, repatriation of overseas earnings and increased infrastructure spending. Meanwhile, capital expenditures, which can have a multiplicative impact on the economy, are expected to rise by about 5% (median of the S&P 1500) following a slight decline in 2016. Figure 3 shows one- to three-percentage-point increases in key 2017 financial measures, according to analysts’ consensus estimates.
Figure 3. 2016 growth results and 2017 expectations for the S&P 1500 median
But the picture isn’t all rosy, as anti-trade and restrictive immigration policies could hamper domestic growth. What’s more, the rapid pace of policy changes could introduce instability into the business environment. Clearly, the calibration of incentive plan goals was challenging in 2017, given the cautiously optimistic context, and the responses surely varied based on facts and circumstances across various sectors.
The election brought renewed optimism among investors, which translates into greater expectations for corporate results. It also brought more volatility into the equation. This, in turn, led to the Great Trump Rotation, as investors began betting on which sectors would fare more favorably under the new administration. For insights into final 2016 results as well as expectations for 2017 in key sectors, click on the links below.
Ryan Lucki is an executive compensation consultant in Willis Towers Watson’s Pittsburgh office. Chris Kozlowski is a senior executive compensation analyst in the firm’s Pittsburgh office. Steve Kline, CFA, is a director in the Pittsburgh office who leads Willis Towers Watson’s efforts to develop innovative approaches to pay-for-performance measurement and analysis. Email firstname.lastname@example.org