Now that the focus has shifted from the surprise outcome of the British referendum, market direction is likely to be guided by the Q2 results. The formal commencement of the earnings season is about a week away, but major companies that have already reported are revealing a trend that has a lot in common with the last five quarters.
However, there are some factors working in favor of results this time around. Commodity prices have recovered substantially and forex woes have also receded to a large extent. This is why it makes good sense to pick stocks that are likely to report strong Q2 results and also have strong fundamentals to back them.
Energy, Finance, Tech Likely to Disappoint
Oil prices have posted quarterly gains due to a weaker dollar, fall in the U.S rig count, rise in gasoline consumption and worldwide outages. However, results from energy companies are likely to be the most disappointing and will weigh on Q2 earnings as a whole. According to Zacks estimates, total earnings for the sector’s S&P 500 stocks will fall by 78.9% on a 27.1% decline in revenues.
The other major sectors, which will act as a drag on Q2 earnings, are finance and technology. Q2 earnings for the finance sector’s S&P 500 stocks are projected to fall by 5.8% on a 0.3% decline in revenues. A soft interest rate environment and sliding benchmark treasury yields are the primary reasons for the sector’s woes.
In technology’s case, Apple’s (AAPL) earnings alone will weigh on other stocks from the sector. A 28.4% fall in earnings is expected for the iPhone maker on a 15.2% decline in revenues year on year. This will send the sector’s earnings 4.5% lower despite a 0.4% increase in revenues.Â
Why Q2 Could be Better
Second quarter earnings will begin in earnest with Alcoa (AA) reporting on Jul 11. Some S&P 500 companies that have already released results offer a mixed picture. However, a fair conclusion can only be drawn after more companies report earnings. As of now, Zacks estimates for S&P 500 companies indicate that earnings will decline by 6.2% on a 0.7% decline in revenues.
