Investors hope earnings are less bad
As season kicks off Monday, focus is on corporate profits
Earnings season kicks off Monday. Investors know it’s going to be bad. They just hope it’s not worse.
Alcoa reports its results for the second quarter Monday, marking the unofficial kickoff of earnings season. As the initial shock of the United Kingdom’s decision to exit the European Union wears off and the U.S. stock market is close to setting new highs, investors will put great importance on corporate profits.
Things aren’t looking very good. Analysts expect profits reported by companies in the Standard & Poor’s 500 index to be down 5.2% during the quarter from a year earlier, says S&P Global Market Intelligence. That’s worse than the 2.5% drop in earnings expected April 1 and a big reversal from the 4.1% growth analysts called for Jan. 1.
It would be the fourth straight quarterly drop in profit, a dubious feat that hasn’t happened since 2009. Revenue is likely to fall 0.8%, which would be the sixstraight quarterly decline.
Despite the scary headline numbers, investors and analysts look for positive signs in a dark earnings season, including that:
The worst is hopefully over. Investors and analysts hang on the fact that even if profits do fall 5.2% in the second quarter, that would be an improvement from the 6.8% decline in the first quarter. Analysts call for S&P 500 earnings to grow 2.2% in the third quarter. “If the sequential improvement in growth holds up as earnings season unfolds, that would mean that (the first quarter) was in fact the trough in the earnings recession,” Lindsey Bell, analyst at S&P Global, wrote in a note to clients.
Energy is less of an anchor. Energy companies got a much-needed break from the freefall in oil prices during the second quarter. WTI Crude Oil rose more than 20% during the quarter to $48.33 a barrel. Oil prices, however, are still 21% lower than were they were a year ago. Energy companies’ earnings are likely to be the worst in the S&P 500, falling 81%. But that’s an improvement from the 106.6% decline in the first quarter.
There are pockets of growth. Optimists point out that four of the 10 sectors — consumer discretionary, health care, industrials and utilities — are likely to post earnings growth during the quarter. Consumer discretionary stocks are predicted to produce the best growth, with profits up 21.3%.
It will be difficult to look past how difficult the second quarter was, but investors know the past isn’t what matters as long as the future looks better — at least for now.