Second-quarter earnings season starts in earnest this week, with everyone from Pepsi (PEP) to the banks reporting April-through-June results. With the bull market showings signs of weakness—the Nasdaq has fallen about 1.8% in the last three weeks—this earnings season feels pivotal. For at least one sector, Q2 earnings seem downright critical.
See if you can guess which sector it is, based on this chart of the year-to-date performance in the S&P 500’s 10 major sector ETFs (plus the S&P index itself):
That’s right: energy stocks are the only sector in the red in 2017, and trail every other sector by at least 18%. The 20% decline in oil prices is what’s ailing the energy industry, as companies large and small are struggling to turn a profit. Second-quarter results are expected to improve, with analysts anticipating big EPS improvements at Exxon (XOM) and Chevron (CVX) and a 30% sales boost at ConocoPhillips (COP). The latter could especially use an earnings beat after missing estimates by a wide margin in the first quarter.
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Really, the industry as a whole could use a few Q2 beats. And that should have energy investors on pins and needles these next few weeks.
If the energy sector is a 10 on the angst meter this earnings season, then housing is probably about a 7. Housing stock gains (+3%) have been rather modest this year amid signs that the real estate market is slowing down. Lowe’s (LOW), in fact, has missed earnings estimates in three of the last four quarters, and the stock has fallen 5% during that time. The company’s profits declined more than 28% last quarter. It’s one of several home-related stocks that could use a beat.
Then there’s the retail sector. Consumer discretionary stocks (+9.6%) have actually outpaced consumer staples (+5.4%) so far this year, as companies like Amazon (AMZN) and eBay (EBAY) are picking up the slack even as department stores and mid-priced big box stores are all but fading into extinction. The latter may be a lost cause, but bricks and mortar companies that sell either high-end luxury goods or deep-discount items (think Five Below (FIVE)) are thriving. Those companies will need to keep proving themselves to help retail stocks from cratering.
In a very mixed bag, the retail sector probably rates about a six out of 10 on the angst meter this earnings season.
Last but not least are the banks. Some of the biggest ones report earnings this Friday, as Citigroup (C), JPMorgan and Wells Fargo (WFC) will release second-quarter results. It’s been a topsy-turvy five months for bank stocks since Trump took office, but right now they have momentum after all 34 banks subjected to the Dodd-Frank Stress Tests passed muster last month. That did wonders for bank dividends, as many of the largest financial institutions returned money to shareholders in the form of dividends and stock buybacks.
A good quarter could extend the bank stock rally. Fortunately, analysts anticipate about a 5.5% earnings increase for the sector, second only to tech in terms of expected year-over-year increases.
With the banks having already passed the stress tests, I think this earnings season will be considerably less stressful for investors in the financial sector. I’d rate financials about four of 10 on the angst scale this earnings season.
These ranking are all very subjective and arbitrary, of course. But hopefully this gives you some backdrop heading into what should be an important earnings season. With sector rotation in full swing, some sectors need solid earnings results more than others.
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