Market Beat: Better than expected third
October 11, 2018
Earnings reporting for the third quarter of 2018 will get going next week and most companies will have their reports out by November.
Traditionally, Alcoa Aluminum kicks off the earnings season. Alcoa used to be a component of the Dow Jones Industrial Average, but it isn't a member of the Dow any longer. Alcoa will report on Oct. 17, but we will have some major reports out before then. As of today, 21 of the 500 S&P companies have already reported and 18 of those have reported better than expected earnings.
Some of the big banks like J.P. Morgan, Citigroup and Wells Fargo will all report on Oct. 12. The outlook for this quarter is good, but the predicted rate of growth has been revised down somewhat in recent weeks. According to data from FactSet, the current forecast rate of growth is at 19.2 percent. On June 30, the estimated earnings growth rate was 20.4 percent. If the earnings growth does come in at 19.2 percent, it will be the third-best quarter since the first quarter of 2011. Stock market valuations are high now. The forward PE, or price to earnings, ratio is at 16.7 which is slightly above the five-year average of 16.4 and higher than the 10-year average of 14.5.
The Energy Sector is expected to report the best earnings growth at 94.9 percent, mostly due to an increase in the price of crude oil. The average price of crude oil for the third quarter was 44 percent higher than the third quarter of 2017, which is no fun when you go to fill up your gas tank.
The Financials Sector should report the second-best growth rate at 33.8 percent. All five of the industries in the Financials Sector are expected to report double digit growth, led by the Diversified Financial Services Industry.
Materials are expected to report the third best growth rate at 26.8 percent. The Materials Sector should be led by the Metals & Mining Industry.
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Revenue growth is forecast to come in at 7.3 percent and is expected to be led by the Energy Sector and the new Communications Services Sector. The relatively new Real Estate Sector should be the third-best sector in terms of revenue growth.
Earnings season can create some volatility in stocks if the reports are quite a bit better or worse than the expectations. I'll do an update as the season gets going in full swing over the next few weeks.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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