Tahoe-Truckee Market Beat: Second quarter earnings forecast
Second quarter earnings reporting season is getting underway this week. Traditionally the first company to report is Alcoa, who reported their numbers Monday after the close.
The bar is set pretty low for earnings and revenue growth. According to data from Factset, the estimated earnings decline for the second quarter is minus -5.6%. If we do see another earnings drop, it will be the first time the S&P 500 has had five consecutive quarters of earnings decline since 2008-2009.
Revenues are also forecast to drop. The consensus revenue decline is projected to be minus -0.7%; if that occurs it will be the sixth consecutive quarter of revenue declines.
The Brexit vote created some short-term volatility in the stock market with a drop in the S&P 500 of over 5% in just two days. The market has since fully recovered and as I am writing this; the S&P 500 is sitting at record levels having taken out the old record set on May 15, 2015.
Brexit should not have much long-term impact on the US economy. Most S&P 500 companies did not cite Brexit concerns during their quarterly earnings calls. Only two reporting companies thought that Brexit would have a negative impact on their earnings due to currency fluctuations with the British Pound.
Once again, the telecom services sector is supposed to have the highest rate of earnings growth at +7.5%, led by AT&T. Consumer Discretionary is second with a projected growth rate of 6.4%. The Consumer Discretionary sector should be led by Internet Retail, Home Goods and Autos.
The Energy sector should have the largest earnings decline at minus -77.1%. Energy has been affected by the low price of crude oil. If Energy were excluded from the S&P, the earnings decline would only be minus -2.1% instead of minus -5.6%. The next worst sector should be Materials with an earnings drop of minus -12.3%.
Earnings and revenue growth are projected to return in the second half of this year. It looks like the economy will be stuck in a low growth, low interest rate mode for the foreseeable future.
With U.S. stocks at record levels, it will be a relief to see a return to earnings growth later this year if it materializes. For now we’ll monitor the earnings reports over the next few weeks and hope that there aren’t too many downside surprises.
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.