Third quarter earnings preview
October 11, 2017
Earnings reports for the third quarter of 2017 that just ended will get underway soon. Traditionally, aluminum maker Alcoa kicks off the reporting season with their announcement.
This quarter, Alcoa will report on Oct. 18 after the market closes. The market is valued fairly high right now with a forward price to earnings ratio of 18.0, which is above both the five-year average of 15.6 and 10-year average of 16.1.
According to FactSet, the earnings growth rate predicted for this quarter is 2.8 percent. That growth rate has been revised downward recently, primarily due to the effects of the hurricane season and the earthquake in Mexico.
On June 30, the growth rate was estimated at 7.5 percent and on Sept. 5 it was estimated to be 5 percent. There is still a pretty good chance that the actual reported earnings will be higher than the estimated earnings, and we could still see an earnings growth rate of about 6 percent for the quarter. It's pretty common for companies to report actual earnings that beat the estimated earnings.
The Insurance industry has been impacted the most by the storms, and accounts for over 75 percent of the downwardly revised earnings over the last couple of months.
Companies with more global exposure are expected to report greater earnings growth compared to companies that do less business overseas. Global gross domestic product is expected to grow by about 3.5 percent this year. The Energy and Information Technology sectors should benefit the most from the growth in the global economy.
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The Energy sector is supposed to have the best year-over-year earnings growth for the quarter, mainly because the third quarter of 2016 was not very good for Energy. The next best sector should be Information Technology led by the Semiconductor Industry. The third best sector is expected to be the Real Estate sector, led by Specialized REITS and Retail REITS. REIT stands for real estate investment trust.
The Financials sector is projected to have the greatest decline in earnings at 7.8 percent, led by the Insurance Industry. Consumer Discretionary is supposed to be the next worst performing sector with an earnings drop of 2.8 percent. Automobiles should be the worst performing industry in the sector with an earnings decline of 23 percent.
Earnings reporting can create some volatility in the market, especially in individual stocks. We'll have to wait and see what happens when the reports are released, hopefully the trend of solid earnings growth will continue.
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.