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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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Life Returns To S&P 500 Ahead Of Earnings Report

Stocks

After remaining dormant in the month of June, the S&P 500 has roared back to life in July. The market benchmark is up a cool three percentage points over the past five days alone thanks to widely held expectations for a blistering Q2 earnings season set to kick off in earnest in the week starting July 16. Investors remain largely optimistic even as trade war drumbeats continue reverberating in the background.

So far, 21 of the S&P 500’s five hundred companies have reported Q2 results, with 19 managing to top earnings estimates.

Meanwhile, a nice lineup slew of companies is expected to report over the next few days with Delta Airlines (NYSE:DAL) scheduled on July 11 and CitiGroup (NYSE:C), JP Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) expected on July 13.

(Click to enlarge)

Source: CNN Money

Blowout Earnings

Wall Street expects an overall very good earnings season with virtually all sectors recording  positive earnings and revenue growth. The consensus on The Street calls for the S&P 500 to record an impressive earnings growth clip of 20.1 percent, while blended revenue growth is expected to clock in at 8.1 percent. That will mark the highest earnings growth by the stocks market since Q3 2010 when earnings expanded at a brisk 34 percent.

S&P 500 Earnings and revenue growth estimates by Thompson Reuters

(Click to enlarge)

Source: Thomson Reuters

There’s a fair chance that earnings will even exceed those rosy projections. Related: Pentagon Courts Tech Giants For Artificial Intelligence

The S&P 500 has managed to beat Wall Street estimates over the past 12 consecutive quarters, so investors should probably expect more of the same.

(Click to enlarge)

Source: FactSet

Some of the sectors expected to outperform include:

#1 Energy

Earnings by the energy sector are expected to increase a blistering 141.5 percent year-over-year for the second quarter, the highest by any sector, while revenue growth is expected to be 19.9 percent, again the best by any sector. That should come as no surprise to anyone considering the swift recovery in crude oil prices. The price of WTI crude is closing in on $75 per barrel compared to sub-$50 levels a year ago.

(Click to enlarge)

Source: Nasdaq

The energy sector is a big reason for the impressive showing by the S&P 500. Excluding the sector, earnings growth estimate for the market declines a good 3 percentage points to 17 percent, while revenue growth falls 110 basis points to 7 percent.

#2 Basic Materials

The Basic Materials sector is projected to post 33.5-percent earnings growth, while revenues are expected to expand 13.2 percent, both the second-highest in the market.

Related: Netflix Struggles To Take Off In Asia

The industry seems to have achieved maturity in its life cycle as evidenced by a wave of consolidations as well as favorable secular trends including waste reduction and innovation in the global supply chain.

Materials stocks, though, have underperformed in 2018 with the Materials Select Sector Index (XLB) sporting an YTD return of -1.8 percent--suggesting undervaluation.

#3 Technology

The tech sector is expected to report 25.5-percent earnings growth coupled with 12.4-percent revenue growth for the second quarter, thanks in large part to Trump’s tax cuts. Stocks in the sector have been flying high, too, with the Technology Select Sector ETF (XLK) having returned 12.2 percent, among the best in the S&P 500.

The sector is expected to continue blazing the trail and make even further gains.

Despite growing fears about an impending recession due to an increasingly flattening yield curve, bullish Wall Street watcher Bill Stone has reassured investors to stop being too fixated on the yield curve since an imminent recession both in the US or globally remain highly unlikely.

(Click to enlarge)

Source: Federal Reserve Bank of St. Louis

By Alex Kimani for Safehaven.com

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