Starting this week, corporate earnings, revenues and management outlook will determine the future course of the stock market. But, Wall Street expects the first back-to-back earnings decline as trade war concerns and fears of a recession take center stage.
While most of the sectors are expected to bleed, energy players, financials, business services, utilities and transportation are a few that are poised to report positive earnings results. Thus, it won’t hurt to keep a close watch on these sectors for the next few weeks.
Is an Earnings Recession Likely?
Market pundits anticipate a recession, defined as two successive quarters of year-over-year earnings decline, for the first time since 2006. Total earnings for the S&P 500 Index are expected to fall 3.4% from the same period last year despite 3.9% higher revenues. This would follow a 0.2% decline on 4.5% higher revenues in Q1. Small-cap companies, which have a market capitalization between $300 million and $2 billion, are expected to report results not as good as their blue-chip counterparts.
The 25% U.S. tariffs on some goods coming from China and the potential threat of more provided U.S.-China trade talks fail are the primary reasons for the drab earnings projections. Trade wars, as we known are never good for the economy and it certainly squeezes profit margins.
Talking about margins, a steady rise in wages and strength in the U.S. dollar are widely expected to aggravate margin pressure. It’s worth pointing out that S&P 500 companies now expect revenue growth though the weakest since the third quarter of 2016. Citing Bank of America’s analysts further, non-financial companies will especially see net margins of 10.8% in the second quarter, down from 11.5% reported in the same period a year ago.
BofA analysts added that “we have been highlighting risk to margins from rising input costs for companies that don’t have pricing power, as well as for labor-intensive companies and sectors amid rising wages, and we expect full-year net margins to contract to 11.2 per cent in 2019 ex-financials from 11.7 per cent in 2018.”
Things Not Looking Up for Materials & Tech Either
The Materials sector, in particular, has the largest exposure to China and the ongoing trade war between Washington and Beijing is sure to have been a bother in Q2. The sector is expected to report a 32.1% decline in earnings and a 9.9% drop in revenues.
Tech companies have for quite some time driven corporate earnings in the past decade. But, the information technology sector is now set to shrink, with expectations of a 10.7% fall in earnings despite 2.4% gain in revenues. Tech companies are largely suffering due to an inventory glut for semiconductor companies.
Meanwhile, trade issues and softening economic data have helped the utilities sector expand leaps and bounds. The sector is positioned to report solid earnings and revenues growth of 2.6% and 2.5%, respectively.
Potential Gainers of Q2
The energy sector, in the meantime, is poised to report the highest earnings growth among all sectors —5.6% from the same period last year on 5.1% higher revenues.
Among the sub-sectors, oil and gas exploration and production; oil and gas refining and marketing; oil and gas equipment and services; and oil and gas drilling companies are positioned to see solid growth.
A more or less healthy crude pricing scenario is primarily fueling the optimism. Needless to say, oil went from pretty low levels a year ago to as much as $60 a barrel in recent times.
The financial sector, to which the Major Banks industry is the biggest contributor, has recently been looking up, with second-quarter earnings expected to rise 3.2% on 6.3% higher revenues. Anticipation of cuts in the federal funds rate has led to a considerable fall in long-term rates, which means there will be an improvement in mortgage loan refinancing activity, leading to more fee income for banks.
So, we can surely expect a good run for banks this earnings season. And let’s face it, strong credit quality, plenty of working capital and a friendly regulatory environment will help banks record significant earnings growth.
Thanks to the green light provided by the Fed, banks are rewarding shareholders with billions of dollars of share buybacks and hikes in dividends. The nation’s top 18 banks have passed the Fed’s stress test, which means such banks can easily buy back shares and raise dividends, and still have plenty of cash to counter recessionary pressure in the near term.
Earnings for the Business Services sector are set to grow 2.9% from the same period last year on 2.8% higher revenues. This sector, in particular, is expected to gain on a healthy labor market. The United States added a heartening 224,000 jobs in June, way higher than analysts’ expectations of 170,000 jobs, per the Labor Department. And professional and business services added 51,000 new jobs, which was the highest among all sectors. Separately, Q2 earnings for the transportation sector are poised to be up 2.7% from the same period last year on 4.4% higher revenues.
The table below shows the summary picture for the second quarter, in contrast to what was achieved in the first quarter.
These 5 Stocks Could Come Up With Blowout Numbers
Such promising numbers call for investing in companies from the aforesaid sectors, which are expected to report a significant uptick in Q2 earnings.
These stocks have a positive Earnings ESP. This is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Plains GP Holdings, L.P. PAGP owns and operates midstream energy infrastructure in the United States. Its transportation segment engages in the transportation of crude oil and natural gas liquids (NGLs) on pipelines, gathering systems, trucks, and barges. The company is expected to report earnings results for the quarter ending June 2019 on Aug 6. Plains GP Holdings has an Earnings ESP of +57.14%. The company’s expected earnings growth rate for the current quarter is a whopping 460%. The stock has a Zacks Rank #1.
Plains Group Holdings, L.P. Price and Consensus
Plains Group Holdings, L.P. price-consensus-chart | Plains Group Holdings, L.P. Quote
Northwest Bancshares, Inc. NWBI operates as a holding company for Northwest Bank that offers various personal and business banking solutions. The company is expected to report earnings results for the quarter ending June 2019 on Jul 22. Northwest Bancshares has an Earnings ESP of +3.57%. The company’s expected earnings growth rate for the current quarter and year are 12% and 8.8%, respectively. The stock has a Zacks Rank #1.
Northwest Bancshares, Inc. Price and Consensus
Northwest Bancshares, Inc. price-consensus-chart | Northwest Bancshares, Inc. Quote
Prosperity Bancshares, Inc. PB operates as a bank holding company for the Prosperity Bank that provides retail and commercial banking services to small and medium-sized businesses as well as consumers. The company is expected to report earnings results for the quarter ending June 2019 on Jul 24. Prosperity Bancshares has an Earnings ESP of +0.75%. The company’s expected earnings growth rate for the current year is 3.7%. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Prosperity Bancshares, Inc. Price and Consensus
Prosperity Bancshares, Inc. price-consensus-chart | Prosperity Bancshares, Inc. Quote
Avis Budget Group, Inc. CAR provides car and truck rentals, car sharing, and ancillary services to businesses and consumers. The company is expected to report earnings results for the quarter ending June 2019 on Aug 6. Avis Budget has an Earnings ESP of +15.07%. The company’s expected earnings growth rate for the current year is nearly 11%. The stock has a Zacks Rank #1.
Avis Budget Group, Inc. Price and Consensus
Avis Budget Group, Inc. price-consensus-chart | Avis Budget Group, Inc. Quote
Telephone and Data Systems, Inc. TDS is a telecommunications company which provides wireless, cable and wireline broadband, TV, voice, and hosted and managed services in the United States. The company is expected to report earnings results for the quarter ending June 2019 on Aug 2. Telephone and Data Systems has an Earnings ESP of +9.68%. The company’s expected earnings growth rate for the current quarter and year are 6.9% and 5.1%, respectively. The stock has a Zacks Rank #1.
Telephone and Data Systems, Inc. Price and Consensus
Telephone and Data Systems, Inc. price-consensus-chart | Telephone and Data Systems, Inc. Quote
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