They say hindsight is 20/20 and when it comes to second quarter earnings season, it seems the markets knew well in advance where the triumphs and troubles were going to be.
"The markets usually tell you what's coming on the earnings side of things," says Hugh Johnson, chairman and CIO of Hugh Johnson Advisors, in the attached video. "And the markets were certainly right this season telling us Tech would not do well and Financials would do well."
Officially, analysts are looking for Financial sector earnings to grow 16.9% in the second quarter, while their expectations for the Tech sector predict profits will fall by 9.5% FactSet data shows. This at a time when the full S&P 500 is seen growing earnings per share by about 1%.
Even when sector (and index) heavy-weight Apple (AAPL) is excluded, FactSet says Technology profits would still be down by almost 7%. While Apple's Q3 earnings of $7.47 per share beat estimates by about 2.5%, they were down 22% from a year ago. At the same time revenue was up less than one percent and the computer-makers sales guidance for the current quarter was also underwhelming.
In addition, the year-to-date market performance of the sectors themselves has the Financials (XLF) on top, with a 27% gain. At the same time, the Technology sector (XLK) is hovering near the bottom with a 9% gain, which is about half the advance for the index and a signal that problems were likely.
"The Tech sector's relative performance vs the S&P 500 has been dismal for a long time and signaling that we're going to have a tough earnings season," Johnson says. "If you take a look at Intel (INTC), Google (GOOG) and Microsoft (MSFT) last week, and the whole sector versus the S&P 500, and the stock market, once again, was right."
Ultimately, Johnson expects the total profit growth reported to come in "closer to three or four percent" once all the numbers are in. In the meantime, he's once again looking to the market to provide clues as to when tech might heat up and when banks might cool down.
"We need to see technology spending pick up," he says. "I don't see that but am waiting for the tech sector to signal to us that a change in spending on tech is going to start to show up."
At the same time, he's on guard for cracks in the Financial story.
"We've had a real run in the Financials," Johnson says. "At some point those stocks are going to start to signal that the earnings growth rate is going to start to level off."
So far, the message from the markets has been clear and consistent, but as Johnson warns, that doesn't mean it's always going to be that way.