As the week began, over 2,000 public companies have reported second-quarter results, including 86% of the S&P 500 and 19 of the 30 stocks in the Dow Jones Industrial Average. The verdict is a mixed bag, as expected, but …
Market Roundup
A few sectors stand out with excellent results, including the one and only sector to score a rare earnings-season trifecta!
First, the headline stats, which is a good-news, bad-news story …
With 2,000+ reports already in the books for the second quarter, the good news is that 65% of companies posted earnings ahead of estimates.
That’s a strong reading compared to the recent average.
As shown in the graph below from Bespoke, positive profit surprises are being led by technology, industrial, and health care stocks. Also, 54% of S&P 500 companies are beating their top-line sales estimates, but that’s slightly below the five-year average of 55%.
Now for the bad news: Second-quarter earnings are on track to drop 3.5% year-over-year, which marks the fifth straight quarter of declining profitability for the S&P 500!
That’s the longest earnings losing streak since the Great Recession in 2008-2009.
Worse, Wall Street estimates don’t improve much for the second half of 2016 either, with the consensus expecting S&P profits to fall 0.3% for the full year, after a 0.8% decline in 2015.
If that happens, it will also be the first time S&P 500 profits fell two years in a row since … you guessed it … 2008 and 2009.
If this sounds to you like more bad news than good, you’re not alone.
The ongoing earnings recession is a big reason why investor sentiment is so pessimistic right now. The S&P 500, Dow, and Nasdaq may have vaulted to new all-time highs recently, but sales and profit growth have been flat-to-falling since mid-2014.
| “I pay more attention to the trend in earnings estimates …” |
I pay more attention to the trend in earnings estimates, rather than the actual earnings-beat rate. In many cases, earnings surprises may be baked into the cake – or priced into stocks already.
It pays to look more closely at the movement in earnings and sales estimates over the last several months to get a complete picture of which sectors’ results are trending in the right direction. Plus, keep a watchful eye on what management is saying about future prospects.
The sectors with the highest 3-month earnings-revision ratios – meaning industries with a greater number of increased profit estimates – are shown in the graph below from Merrill Lynch.
The highlights:
#1: Health Care, with twice as many increased profit forecasts as estimate cuts …
#2: Energy isn’t far behind with a positive 3-month earnings-revision ratio of 1.8, and …
#3: Materials is slightly positive with an earnings-estimate ratio of 1.1, meaning a slight edge to increased profit estimates.
When it comes to the 3-month change in sales forecasts, energy comes out on top with 1.5 times as many increases in analyst sales estimates as cuts.
Health care is number two with a positive sales revision ratio of 1.1. All other sectors and the S&P 500 itself have more negative than positive sales forecasts.
Finally – and perhaps most important of all – is the ratio of management guidance about future business prospects.
Health care scores a rare trifecta, with the best 3-month guidance ratio (+1.9) among all S&P sectors, along with a #1 earnings revision ratio and a #2 sales revision ratio.
This means nearly twice as many health care companies have a favorable vs. unfavorable business outlook regarding sales and profit growth going forward. And that’s according to their own management, who should be in the best position to know.
That’s a bullish sign for the health care sector.
Industrial and Technology stocks are the only other two sectors with a positive guidance ratio in recent months.
And it’s no surprise that these three are also among the best-performing sectors over the last six weeks, with tech stocks up 15%, health care up 9.1% and industrials gaining 9.5%.
Good investing,
Mike Burnick
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According to Former Fed Chairman Ben Bernanke, the Fed won’t be raising interest rates any time soon. The reasoning is that Fed officials have been wrong on their economic forecasts over the past several years – where they’ve expected economic growth to be stronger – and both the unemployment rate and the natural level of interest rates to be higher.
“In general, with policymakers sounding more agnostic and increasingly disinclined to provide clear guidance, Fed-watchers will see less benefit in parsing statements and speeches and more from paying close attention to the incoming data,” Bernanke stated.
In a new Bloomberg Politics national poll, Hillary Clinton now has a 6-point lead over Donald Trump in a two-way contest among likely voters. Results show 61% of likely voters are less impressed with Trump’s business expertise than they were when the campaign began.
According to a Monmouth University Poll released today, Americans feel the nation’s “way of life” is under some degree of threat. Indeed, 47% of the registered voters surveyed said the “American way of life” is under “a great deal” of threat. Some of the concerns were Islamic terrorists, political policies from both the Republican and Democratic Parties, and undocumented immigrants from Mexico. Only 30% surveyed feel the country is heading in the right direction.
The Money and Markets team
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 12 comments }
ZIRP and NIRP continue to slowly erode economic activity while the Fed remains clueless to that fact. There is an aviation term called ‘behind the power curve’ where when you pull back on the stick to go up, drag increases faster than lift does so you go down instead. The more you pull back on the stick to go up, the faster you go down. We are in an equivalent economic situation where efforts to lower interest rates destroy the multiplier effect faster than the low interest rates stimulate sectors that respond to low interest rates. More damage is being done than good.
Interesting data, Mike. The ugly secret about the healthcare sector’s strong revenues is that nearly all of it can be attributed to the huge tax increase known as Obamacare. Like Big Government itself, the bloated, corrupt healthcare sector’s growth is not a source of productivity, but of monumental waste.
Spot on about the corrupt healthcare sector.
I just picked up a freaking laxative prescription so they can check out my plumbing. The retail cost of the stuff is $95.00. It is a mixture of some simple salts in an aqueous solution that can’t cost seventy five cents to mix and bottle in quantity.
A bottle of milk of magnesia would do the same job for $4.00 and change and it is one of the same ingredients in the prescription version.
Is it any wonder our health care system chews up 17% of our GDP and provides the absolute worst outcomes when compared to every other industrialized country?
No one’s said it better than you just did.
Anyone who goes into business will have a bloody nose from one fight or another before he is done. Very few people who have not made such a venture understand that. Media however chooses to concentrate only on the failures. Trump did not get to his success by being either stupid or casual in his persistence. What astounds me is that that same media does not chronicle poor performance and outright prevarication on Mrs. Clintons part. Perhaps I ought not be surprised since the media is apparently satisfied with its own casual performance and its belief in the stupidity of the everyday citizen. Lies and deceit are still lies and deceit even if the media is disinclined to admit it.
If in the Monmouth poll 47% feel Americas way of life is under direct threat from the same things Trump has been talking about how is it that in a Bloomberg poll that 61% of Likely voters are less impressed with Trumps business expertise than when he started to campaign ??? Did any one of these 61 % watch his speech from Detroit which he laid out how Detroit lost its way of life due to globalization and bad policies ???? Also in that Speech Trump started to lay the groundwork of what he intends to do about it . Trump wants lower corporate taxes , lower regulations on business and energy and a drastically simplified tax code . How can they be less impressed now than when he started ????
as usual those that can DO AND THOSE THAT CANT CRITICISE
Vinman
I wonder where the money will come from?? Christmas is a wonderful holiday sadly all the presents under the tree including the tree are paid for with borrowed money. Merry Christmas. To bad we can not structure our life on this Wimpy principal.
Gordon
You are correct these Trillion Dollar deficits will continue if we do not get America back to work . I do not believe the official 4.6% Unemployment figure , I believe it to be at least 10% or more . Getting people back to work will create more revenue for the government and lower government expenditures as the government has to dole out less money in Unemployment , Welfare , Food stamps and other government assistance programs . So getting America back to work will go a long way to reducing government deficits !
Too much money in the hands of a few. The middle class needs tax reform and educational financial support.
Someone once said, “There are lies, there are damned lies, and also statistics.â€
But I’ve always maintained, “There are lies, there are damned lies, there are government statistics, and also polls.
Unfortunately polls can be skewed by favoring and having a larger # of one demographic over another .