After A Quarter Like That, Are There Any Stocks Worth Investing In?

After A Quarter Like That, Are There Any Stocks Worth Investing In?
Carl Hazeley

over 1 year ago3 mins

  • Analysts are expecting S&P 500 companies to deliver 4.2% earnings growth in the second quarter – the lowest since the fourth quarter of 2020.

  • Growth is expected to be highest for energy, industrials, materials, and real estate firms, and lowest for financials, utilities, and consumer discretionary companies.

  • Overlaying recent share price performance and the direction of analyst earnings estimates can help you focus on the most attractive sectors and companies.

Analysts are expecting S&P 500 companies to deliver 4.2% earnings growth in the second quarter – the lowest since the fourth quarter of 2020.

Growth is expected to be highest for energy, industrials, materials, and real estate firms, and lowest for financials, utilities, and consumer discretionary companies.

Overlaying recent share price performance and the direction of analyst earnings estimates can help you focus on the most attractive sectors and companies.

Mentioned in story

What a quarter it’s been: record high inflation, rising interest rates, a bear market, ongoing geopolitical tensions, a crypto crash, and plenty more besides. But saying sayonara to June puts it firmly behind us. So as companies start to tell us how they got on, here’s where the biggest opportunities might be hiding.

What are analysts expecting?

Analysts are expecting S&P 500 companies to report second-quarter earnings that are 4.3% higher than the same time last year. If they’re right, it’d be the lowest earnings growth rate since the fourth quarter of 2020.

But there is still growth to be found. It might be highest in the energy industry, where earnings are forecasted to be 215% up on the same time last year – though that’s perhaps no surprise given what’s happened to oil prices this year. The earnings growth forecasted for industrials firms (27%), materials companies (14%), and real estate companies (11%) pales in comparison, but it’s worth being aware of.

The biggest earnings declines are expected to come from financials (-21%), utilities (-10%), and – just like last quarter – consumer discretionary firms (-3%), as high inflation forces consumers to tighten their purse strings.

Earnings estimates

What’s the opportunity here?

A simple strategy would be to overweight your US stock holdings towards the sectors with high earnings growth and underweight (or altogether avoid) sectors where earnings are expected to shrink.

You can inform that strategy by looking at recent share price performance and the direction of earnings estimates. US energy stocks, for example, US energy stocks fell 6% on average in the last quarter (though they’re still up 32% this year), yet analyst estimates for second-quarter growth have risen from 137% to 215%. That suggests there could be an opportunity if those stocks can meet or beat expectations.

We can apply the same methodology to the other key sectors. Industrials’ 16% tumble last quarter versus a modest increase in earnings growth forecasts for the sector potentially sets up an attractive risk-reward scenario this earnings season. Materials stocks fell by a similar 17% last quarter, but earnings growth expectations have more than doubled over the last three months, which makes them a potentially appealing prospect too. Real estate is perhaps the least interesting of the bunch: its 17% decline last quarter wasn’t accompanied by much of a change to earnings growth forecasts at all.

These sector groupings reflect the average of a broad range of companies, but you might want to apply the approach to individual stocks you care about. Take oil giant Exxon, for instance: its stock climbed about 5% last quarter, but its second-quarter earnings forecast rose 28%. Now, let’s divide that 28% by 4 to give an estimate of the annual earnings impact (acknowledging that this analysis ignores the next two quarters), and you get a roughly 7% increase in earnings versus a 5% increase in the stock price. All else equal, that appears well-balanced. So if I were looking for single stock ideas in the energy sector this earnings season, I’d look elsewhere.

To do this yourself, you can use a free tool like Koyfin that allows you to track company or industry share price performance and compare it to earnings forecasts. Just pop whatever you’re interested in into the search bar, and you can do a back-of-the-envelope set of calculations that may uncover a few new opportunities.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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