Market Beat: Energy sector rebounds in Q2
August 2, 2017
Corporate earnings are the major driver of stock prices. Of course, earnings are strong when the overall economy is doing well and consumers are spending. The gross domestic product (GDP) report for the second quarter that came out last week showed the economy grew at a 2.6 percent annualized rate for the quarter.
Earnings reports have also been somewhat better than the expectations. To date, more than half of the S&P companies have reported and according to data from FactSet, the year-over-year earnings growth rate is 9.1 percent. At the end of June, the growth rate was forecast to be 6.5 percent
Ten of the 11 different sectors have reported positive earnings growth, led by the Energy sector which has been a laggard over the last couple of years, due mainly to the low price of crude oil. The earnings growth rate for the Energy sector was 322.8 percent.
Information Technology was the next best performing sector with a growth rate of 12.9 percent. The semiconductor and semiconductor equipment industry led the Information Technology sector.
Financials were the third best performing sector with a 10.7 percent growth rate. The leading industry in the Financial sector was the Insurance industry.
The worst performing sector and the only one with a negative growth rate was the Consumer Discretionary sector, which declined 1 percent. Leisure Products were the worst performing industry in this sector as they dropped 59 percent. Amazon.com reported earnings of just $0.40 per share this quarter compared with $1.78 per share in the second quarter of 2016. Amazon was the worst performing company in the sector.
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The current forecast for the rest of the year is fairly optimistic. Presently, the estimate for next quarter is for an earnings growth rate of 6.1 percent and a rate of 11.7 percent is forecast for the fourth quarter.
The stock market is at record levels and the valuations are also higher than the long-term average. The current forward price to earnings ratio or PE is 17.7. The 10-year average PE ratio is 14.0 and the five-year average is 15.4, so the market is fully valued here.
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.