Market Beat: Second quarter earnings forecast
TRUCKEE, Calif. andamp;#8212; The stock market is driven by numerous forces. On Friday, July 6, the market declined because the monthly jobs report wasnandamp;#8217;t very good, as only 80,000 jobs were created in June. The market has been on a wild ride lately due to reports coming from Europe on potential solutions to some of the Euro zoneandamp;#8217;s memberandamp;#8217;s debt crises.Though the market reacts to a wide variety of economic and non-economic news reports, the main driver behind stock prices is corporate earnings. Companies report their earnings on a quarterly basis, and the reports for the second quarter will begin coming out this week. Alcoa is the first of the major companies to report and theyandamp;#8217;ll kick it off on July 9.Large institutional investors will be following these earnings reports very closely and will make investment decisions based on them. One of the most common tools used in stock analysis is whatandamp;#8217;s known as the PE, or price to earnings ratio. To obtain the PE ratio, you divide the stock price by its annual earnings. A stock with a high PE ratio may be considered expensive, and a stock with a low PE ratio cheap. If earnings begin to fall, that can trigger some selling in the market as investors discard stocks they consider too expensive.The forecast for this quarterandamp;#8217;s earnings is not real good. Corporate outlooks are at their worst in nearly four years and many companies have cited problems in Europe as one of their main concerns. More than 85 members of the Sandamp;P 500 have lowered their forecasts in the last several weeks. The earnings growth forecast for this quarter is more than 5 percent, and that is decent andamp;#8212; the only problem is that the growth is due to just two companies andamp;#8212; Apple and Bank of America. Bank of America should have a large earnings gain due to last yearandamp;#8217;s mortgage settlement.The telecommunications sector could be a bright spot, mainly because telecommunications companies have no sales exposure to Europe. The other sector that has been doing well is technology. Technology does have a high sales exposure to Europe. Europe accounts for 25 percent of sales in the technology sector, but Appleandamp;#8217;s earnings should be strong enough to lead the sector to positive growth.It takes about four weeks for the majority of the companies to report andamp;#8212; we start with Alcoa and also get earnings from JP Morgan and a couple of others this week. Earnings are important to monitor as they are one of the main drivers of stock prices.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at http://www.fusiontargetretirement.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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