A few sectors stand out with excellent results, including the one and only sector to score a rare earnings-season trifecta!
First, the headline stats, which is a good-news, bad-news story …
With 2,000+ reports already in the books for the second quarter, the good news is that 65% of companies posted earnings ahead of estimates.
That’s a strong reading compared to the recent average.
As shown in the graph below from Bespoke, positive profit surprises are being led by technology, industrial, and health care stocks. Also, 54% of S&P 500 companies are beating their top-line sales estimates, but that’s slightly below the five-year average of 55%.
Now for the bad news: Second-quarter earnings are on track to drop 3.5% year-over-year, which marks the fifth straight quarter of declining profitability for the S&P 500!
That’s the longest earnings losing streak since the Great Recession in 2008-2009.
Worse, Wall Street estimates don’t improve much for the second half of 2016 either, with the consensus expecting S&P profits to fall 0.3% for the full year, after a 0.8% decline in 2015.
If that happens, it will also be the first time S&P 500 profits fell two years in a row since … you guessed it … 2008 and 2009.
If this sounds to you like more bad news than good, you’re not alone.
The ongoing earnings recession is a big reason why investor sentiment is so pessimistic right now. The S&P 500, Dow, and Nasdaq may have vaulted to new all-time highs recently, but sales and profit growth have been flat-to-falling since mid-2014.
|“I pay more
attention to the trend in earnings estimates …”
I pay more attention to the trend in earnings estimates, rather than the actual earnings-beat rate. In many cases, earnings surprises may be baked into the cake – or priced into stocks already.
It pays to look more closely at the movement in earnings and sales estimates over the last several months to get a complete picture of which sectors’ results are trending in the right direction. Plus, keep a watchful eye on what management is saying about future prospects.
The sectors with the highest 3-month earnings-revision ratios – meaning industries with a greater number of increased profit estimates – are shown in the graph below from Merrill Lynch.
#1: Health Care, with twice as many increased profit forecasts as estimate cuts …
#2: Energy isn’t far behind with a positive 3-month earnings-revision ratio of 1.8, and …
#3: Materials is slightly positive with an earnings-estimate ratio of 1.1, meaning a slight edge to increased profit estimates.
When it comes to the 3-month change in sales forecasts, energy comes out on top with 1.5 times as many increases in analyst sales estimates as cuts.
Health care is number two with a positive sales revision ratio of 1.1. All other sectors and the S&P 500 itself have more negative than positive sales forecasts.
Finally – and perhaps most important of all – is the ratio of management guidance about future business prospects.
Health care scores a rare trifecta, with the best 3-month guidance ratio (+1.9) among all S&P sectors, along with a #1 earnings revision ratio and a #2 sales revision ratio.
This means nearly twice as many health care companies have a favorable vs. unfavorable business outlook regarding sales and profit growth going forward. And that’s according to their own management, who should be in the best position to know.
That’s a bullish sign for the health care sector.
Industrial and Technology stocks are the only other two sectors with a positive guidance ratio in recent months.
And it’s no surprise that these three are also among the best-performing sectors over the last six weeks, with tech stocks up 15%, health care up 9.1% and industrials gaining 9.5%.
According to Former Fed Chairman Ben Bernanke, the Fed won’t be raising interest rates any time soon. The reasoning is that Fed officials have been wrong on their economic forecasts over the past several years – where they’ve expected economic growth to be stronger – and both the unemployment rate and the natural level of interest rates to be higher.
“In general, with policymakers sounding more agnostic and increasingly disinclined to provide clear guidance, Fed-watchers will see less benefit in parsing statements and speeches and more from paying close attention to the incoming data,” Bernanke stated.
In a new Bloomberg Politics national poll, Hillary Clinton now has a 6-point lead over Donald Trump in a two-way contest among likely voters. Results show 61% of likely voters are less impressed with Trump’s business expertise than they were when the campaign began.
According to a Monmouth University Poll released today, Americans feel the nation’s “way of life” is under some degree of threat. Indeed, 47% of the registered voters surveyed said the “American way of life” is under “a great deal” of threat. Some of the concerns were Islamic terrorists, political policies from both the Republican and Democratic Parties, and undocumented immigrants from Mexico. Only 30% surveyed feel the country is heading in the right direction.
The Money and Markets team