US earnings season is getting underway and the mood among corner suite executives and Wall Street analysts is, well, kind of blah.
A super-strong dollar, slumping commodity prices, the prospect of rising interest rates and an uneven global economy are weighing heavily on overall earnings estimates.
Analysts surveyed by FactSet Research are forecasting a 4.5% dip in second-quarter, per share profits among companies listed on the Standard & Poor’s 500 Index.
Shifting Outlooks
Dig a little deeper into the numbers and the earnings picture isn’t so bleak.
Investors just need to be discriminating.
For instance, there’s a big disparity among sector outlooks.
Oil Bust
Energy companies, naturally enough, have been the hardest hit by the prolonged slump in oil prices.
Take that out of the mix, though, and S&P profits could grow more than 8% for all of 2015.
Some sectors such as financial, consumer-discretionary and health-care sectors could see double-digit gains in earnings for the year, according to FactSet Research.
Financials Reborn
Investors are starting to come back to financial stocks, despite all the government fines banks and brokerages have faced thanks to some bad behavior.
Barclays (BCS), Citigroup (C), J.P. Morgan Chase (JPM) Co. and Royal Bank of Scotland Group recently pleaded guilty to currency manipulation following a Department of Justice investigation.
Even so, the KBW Bank Index, representing national money center banks and leading regional institutions, is up 4.5% this year through July 13, compared with roughly a 1% rise for the S&P 500.
The index has advanced 10% over the last year.
Rising Rates
While rising rates are bad news for many companies, they are welcome for financial institutions that lend.
Higher rates are good for banks because lenders can charge more for loans and make bigger profits on the spread between deposit rates and loan rates.
Right Balance
As long as interest rates don’t go up too high, too fast, banks may benefit simultaneously from a stronger economy and higher interest rates.
Some portfolio managers argue that current bank stock valuations don’t reflect the rosier earnings outlook for banks.
Berkshire Hathaway (BRK-A) announced in a recent regulatory filing that it has added significantly to its holdings of Wells Fargo (WFC) and US Bancorp (USB).
Takeaway
Second quarter US corporate results aren’t likely to blow your socks off.
However, the outlook is better if you steer clear of energy companies and consider the financial, consumer-discretionary, and health-care sectors.
As always, there’s hidden value in the market if you know where to look.
Continued Learning: Why the US bull market is winded
Photo Credit: bruceg1001 via Flickr Creative Commons
The investments discussed are held in client accounts as of July 13, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
