Dampening of the global economic outlook, trade tensions with China and a government shutdown aren’t doing any good to investors’ sentiments. By the end of this week, however, corporate earnings, revenues and management outlook will determine the future course of the stock market. Market pundits expect a satisfying Q4 earnings season, mostly in response to robust economic growth.
Let us for now keep an eye on stocks from sectors that are likely to make the most of the Q4 earnings season.
Q4 Earnings to Grow Double Digits
This week, bigwigs like JPMorgan Chase JPM, Wells Fargo WFC and Goldman Sachs GS will be reporting Q4 numbers, and overall S&P 500 results are expected to be satisfactory.
For Q4 as whole, total earnings for S&P 500 companies are estimated to improve 10.5% from the same period last year on 5.3% higher revenues, which would follow 25.7% earnings growth on 8.4% higher revenues in Q3. Thus, Q4 earnings growth is expected to be double-digits for the seventh time in the last eight quarters.
The gains are likely to be broad-based, with nearly all sectors expected to see a year-over-year uptick in earnings, except for autos, conglomerates and utilities. Around seven of the S&P 500 sectors are likely to come up with double-digit growth (read more: Can Earnings Reports Push Bank Stocks Higher?).
What Will Drive Earnings?
Earnings are likely to rise mostly on solid economic growth. The U.S. economy, in particular, is in good shape. Signs of a strong U.S. labor market, by the way, took care of recession concerns. The U.S. economy added 312,000 new jobs in December, the highest hiring in 10 months. This also marked the second-highest job addition in any month of the Trump administration.
(Source: Bureau of Labor Statistics)
Employers added 2.6 million jobs in 2018, more than 2.2 million in 2017. Hiring in October and November was also way higher than reported earlier, with 58,000 new jobs added to the 2018 total. Such a feat was achieved despite questions about employers’ ability to find skilled labor and headwinds associated with slowdown in the cyclical part of the economy, including housing.
The jobless rate, in the meantime, continues to languish at historically low levels, while the hourly pay went up 0.4% to $27.48 last month. In the last 12 months, wages rose to 3.2% from 3.1%, matching a post-recession high set earlier in the year (read more: 5 Top Stocks to Gain From Stellar Jobs Report).
In fact, the U.S. economy is now expected to expand at an annualized rate of 2.8% for the fourth quarter largely due to the blockbuster jobs report, per the Atlanta Federal Reserve’s latest GDPNow forecast model. American employers’ robust hiring while boosting wages indicated sustained strength in the U.S. economy that could ease fears of a global economic slowdown. Earlier the model had predicted GDP growth for the fourth quarter at 2.6%.
Potential Gainers of Q4
The energy sector is poised to report the highest earnings growth at 64.7% from the same period last year on 15.2% higher revenues. Oil prices may have taken a beating after the United States granted waivers to majority of Iran’s key customers, but recently prices bounced back after OPEC agreed to cut production beginning this year, which in turn is widely expected to benefit the energy sector.
Meanwhile, the construction sector has been looking up, with Q4 earnings expected to rise 26.3% on 15.6% revenue growth. Transportation is likely to report the third-highest growth in year-over-year profit, with Q4 earnings poised to rise 22.5% from a year ago on 7.2% higher revenues. Strong holiday season, robust traffic and reduced tax rates are some of the factors that should bolster the earnings scenario of transports in Q4 (read more: 5 Transportation Stocks Set to Surpass Q4 Earnings Estimates).
High profits are also expected from the retail segment. Total Q4 earnings for the retail sector are projected to rise 18.8% from the same period last year on 4.6% higher revenues. After all, nothing could dissuade U.S. shoppers from splurging during the holiday shopping season. According to the most recent Mastercard SpendingPulse report, holiday retail sales (from November 1 through December 24) grew 5.1% last year to more than $850 billion, the highest in six years. The strong holiday sales are being mostly fueled by a healthy economy and high levels of consumer confidence (read more: Cheer Up! Retailers Enjoyed Best Holiday Season in 6 Years).
For the Finance sector, to which the Major Banks industry is the biggest earnings contributor, total fourth-quarter earnings are expected to grow 18.6% from the same period last year on 3.5% higher revenues. Current U.S. government shutdown won’t be much of a pain for banks in Q4, while NIMs are expected to benefit from higher short-term rates and tax cuts will magnify profit growth (read more: 4 Top Bank Stocks to Buy Ahead of Q4 Earnings).
Buy These 5 Stocks for Stellar Earnings Growth
A very strong economic backdrop looks set to deliver another round of solid earnings growth in Q4. This calls for investing in five companies from the aforesaid sectors, which are expected to see a significant uptick in Q4 earnings. These stocks have a positive earnings surprise and are more likely to come up with a positive surprise. These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Shell Midstream Partners, L.P. SHLX owns, operates, develops, and acquires pipelines and other midstream assets in the United States. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has increased 5.5% in the past 60 days. It has an average positive earnings surprise of 10.9% in the last four quarters. The company is expected to report earnings results for the quarter ending December 2018 on Feb 26, 2019.
Armstrong Flooring, Inc. AFI designs, manufactures, sources, and sells flooring products in North America and the Pacific Rim. It operates through two segments, Resilient Flooring and Wood Flooring. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has moved up 10.3% in the past 30 days. It has an average positive earnings surprise of 38.9% in the last four quarters. The company is expected to report earnings results for the quarter ending December 2018 on Mar 5, 2019.
Expeditors International of Washington, Inc. EXPD provides logistics services in the Americas. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has increased 0.9% in the past 60 days. It has an average positive earnings surprise of 12.2%. The company is expected to report earnings results for the quarter ending December 2018 on Feb 19, 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.
Crocs, Inc. CROX designs, develops, manufactures, markets, and distributes casual lifestyle footwear and accessories for men, women, and children. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings has risen 32.4% in the past 60 days. It has an average positive earnings surprise of 126.3% in the last four quarters. The company is expected to report earnings results for the quarter ending December 2018 on Feb 27, 2019.
The Bancorp, Inc. TBBK operates as the financial holding company for The Bancorp Bank that provides banking products and services in the United States. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings has increased 2.6% in the past 90 days. It has an average positive earnings surprise of 2.8% in the last four quarters. The company is expected to report earnings results for the quarter ending December 2018 on Jan 24, 2019.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>