Tahoe-Truckee Market Beat: Time for a 3rd quarter earnings preview
Alcoa just officially kicked off third quarter earnings reporting with their numbers before the market opened on Tuesday. The forecast for this quarter is for another decline in S&P 500 earnings.
According to data from Factset, the earnings drop for this quarter is projected to be minus -2.1%. If we do in fact have an earnings decline this quarter, it will be the sixth consecutive quarter of falling earnings.
Once again, the Energy sector is forecast to have the worst drop in earnings at minus -69.3%. The Energy sector has been hit hard by the fall in the price of crude oil. Due to technological advances in oil exploration and extraction techniques, the global supply of oil is much higher than was previously thought.
Industrials should be the second worst performing sector with a drop of minus -8.1%, led by the Airlines industry.
The Materials sector is supposed to have the second largest drop in forecast earnings growth; the estimate has dropped from +9.3% to +3.7%. The Chemicals industry is projected to have the largest drop in this sector. The Metals and Mining industry should lead Materials, which is projected to be the fourth best performing sector overall.
Consumer Discretionary has posted the third largest drop in their earnings forecasts, from +9.3% to +4.9%, but Consumer Discretionary should also have the second highest growth rate of any sector. Fifty-eight of the eighty-three companies in this sector have had a drop in their earnings forecast for this quarter.
The largest increase in expected growth should come from the Information Technology sector which has risen by +1.8%, from +0.1% to +1.9%.
The best performing sector is supposed to be the Utilities sector with a growth rate of 5.3%. Utilities is forecast to be followed by Consumer Discretionary at +4.9%, then Health Care at +3.9% and Materials with a growth rate of +3.7%.
Currently, the valuation of the market is a little higher than average. The forward P/E, price to earnings ratio, is 16.7; the five-year average is 14.9, and the longer term ten year average is 14.3.
Corporate earnings are the main driver of stock prices and the bar seems to be set pretty low this quarter. It will be interesting to see how the reports come out as the season gets underway here 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.