Second quarter earnings season official kicks off with Alcoa announcing earnings today.
In a note to clients today, UBS' Jonathan Golub writes that in the past two quarters, domestically oriented companies delivered stronger revenue surprises than those with global exposure. And Golub believes this trend is expected to continue.
Here is a breakdown of UBS's top stock picks in each sector that have significant exposure to the U.S.:
Moreover, Golub says there are four key trends that offer insights to upcoming earnings:
- Weaker growth and surprises - As the economic recovery "matures", revenue and earnings growth typically slow. UBS analysts expect "modest surprises" during earnings season and their $25.75 Q2 EPS consistent with a 2 percent beat. Over the past seven weeks expectations for second quarter earnings have come down about 3.7 percent because of weaker economic data out of the U.S., a strong U.S. dollar, weaker international growth and lower commodity prices.
- Less favorable response to announcements - There are two key responses to watch after earnings announcements: "that of investors (i.e. price action) and that of analysts (i.e. earnings revisions)". So far, Q2 earnings announcements have been followed by negative stock price action and lowered EPS forecasts.
- Negative impact from foreign exposure - Foreign exposure is expected to be a drag on earnings and this is being seen in sale trends. While revenue growth for companies with exposure to the global economy outpaced peers through the recovery that trend has reversed in the past few quarters.
- More challenging environment for financials - The second quarter saw a sharp decline in mergers and acquisitions and trading volumes were also impacted. CDS spreads have widened showing the challenging trading environment for U.S. investment banks. UBS banks and brokers analyst Brennan Hawken lowered his second quarter estimated for the five largest banks to $0.41 in the second quarter, and $0.68 for 2012.
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