over 3 years ago • 3 mins
The course of company earnings never did run smooth. So to prepare you for what’s to come in the next few weeks, we’ve looked at how analysts are expecting key sectors to have performed.
US stocks just had their best quarter in more than twenty years, with the main index up 20%. But some analysts have argued that this rise will prove meaningless if it’s not soon supported by company fundamentals – i.e. by earnings growth. Put another way, when analysts compare a company’s share price to its earnings per share, a high price-to-earnings (P/E) ratio suggests stocks are expensive – like now – while a low one implies shares are relatively cheap.
High stock market valuations put pressure on companies to justify them with improving future earnings, and earnings updates play a key part in shaping investors’ expectations for what’s coming next. With that in mind, banks – whose health is essential to the health of the overall economy – will be under the microscope. Analysts expect financial services firms to report 50% lower profits than the same time last year, even though their shares have risen 10% in the last three months. What banks have to say about the effects of low interest rates and the rising cost of defaulted loans on their profits could bolster their recent rally or reverse it altogether.
US tech stocks represent around a quarter of the country’s stock market, and so they’ll be key to maintaining its momentum. Analysts reckon tech stocks will report a 10% drop in profits – the smallest anticipated decline of any industry, bested only by utilities companies whose earnings are expected to be flat. As for stock market celebrities the FAANGs, investors will focus on whether the lockdown-driven acceleration in demand will continue, or if the return to normal life starts to moderate their growth.
With most US companies opting out of forecasts for either the second quarter or the year as a whole, analysts have spent more time than usual digging through the numbers to generate their forecasts. That’ll naturally result in a wider range between the highest and lowest estimates, and a greater risk companies will either dramatically beat or miss forecasts. That’s pretty clear to most investors, though, so it’s likely we’ll see less frantic buying or selling of stocks after their updates than usual.
Fewer than 50 US companies made predictions for the second quarter back when they revealed their first-quarter earnings. And while any future predictions will be heavily caveated by coronavirus developments, those companies with more predictable earnings that do choose to give guidance – like utilities, telecoms, and consumer staples – might find their shares in high demand from investors craving any inkling of certainty.
FedEx offered a preview of exactly what the upcoming season has to offer on Wednesday when it announced higher-than-expected quarterly earnings. The company didn’t give an earnings forecast, mind you, blaming it on the uncertainty of the timing and pace of any economic recovery. But investors didn’t seem to mind and bought up its shares anyway, pushing them up 9%.
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.