Earnings Season Is Coming Up Fast. Here Are The Frontrunners.

Earnings Season Is Coming Up Fast. Here Are The Frontrunners.
Carl Hazeley

over 2 years ago3 mins

  • Analysts are expecting almost 30% earnings growth in the third quarter of 2021, which would be the third-highest growth rate since 2010.

  • The energy, materials, and industrials industries are expected to show the highest earnings growth, while the utilities and consumer staples sectors are expected to show the lowest.

  • Analyst ratings can offer clues about where to invest through earnings season: Amazon, Alphabet, and Microsoft screen well on that basis.

Analysts are expecting almost 30% earnings growth in the third quarter of 2021, which would be the third-highest growth rate since 2010.

The energy, materials, and industrials industries are expected to show the highest earnings growth, while the utilities and consumer staples sectors are expected to show the lowest.

Analyst ratings can offer clues about where to invest through earnings season: Amazon, Alphabet, and Microsoft screen well on that basis.

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Third-quarter earnings season – when companies reveal how they’ve performed over the last three months – is kicking off next month, so get ready to take advantage of any opportunities that may appear…

What are analysts expecting?

At the end of June, analysts were forecasting third-quarter earnings growth of 24.2% for S&P 500 companies compared to the same time last year. But that had risen to 27.6% as of last week, which would represent the third-highest growth rate since 2010.

They’re expecting companies in the energy, materials, and industrials industries to show the highest earnings growth. Communication services (including Facebook and Alphabet) and information technology (including Apple and Microsoft) should show faster-than-average growth versus the S&P 500, while consumer staples and utilities stocks will deliver the slowest.

Energy companies aren’t shown as they’re swinging into profit from losses this time last year.
Energy companies aren’t shown as they’re swinging into profit from losses this time last year.

What can analyst ratings tell us?

Another way to screen for attractive sectors is to look at analyst ratings. They broadly follow where the highest earnings growth is expected to come in: two-thirds of energy stocks are buy rated, as are over 60% of tech stocks, even though their earnings growth isn’t as high as in more cyclical sectors. On the other end of the spectrum, utilities and consumer staples’ low-end earnings growth appears to have earned their stocks the fewest buy ratings at 50% and 42% respectively.

Analyst ratings

But given that this information’s already available to investors, it’s likely already priced into stock prices...

So what’s the opportunity here?

Just because something’s priced in doesn’t mean there aren’t opportunities.

As always, what’ll ultimately drive stocks’ performance when companies announce their results is the implication of those results – as well as of any earnings forecasts – on companies’ future cash flow. That’s because, theoretically at least, a stock’s value today reflects the average value assigned by investors to all a company’s cash flows in the future. So simplistically, if a company does better than expected this quarter or hints it’ll have a stronger-than-expected next quarter or year, its price should rise. If the opposite happens, its price should fall.

Given that companies – and particularly those in the US – typically underpromise and aim to over-deliver when it comes to earnings, you could buy a straightforward exchange-traded fund tracking the S&P 500 – like the Fidelity 500 Index Fund (expense ratio: 0.015%) – and benefit if the balance of companies doing better-than-expected outweighs those that disappoint.

Another way to play this earnings season is to bet on the individual stocks with the greatest proportion of buy ratings. After all, the analysts who dig through every detail of a company before making their recommendations know a thing or two more than your average investor. And while their views are typically long-term, each quarter has the potential to vindicate their bullish forecasts in a big way. In other words, there’s a chance of a short-term windfall.

To do that, you’d want to buy the likes of Amazon, Alphabet, and Microsoft – stocks that over 90% of analysts rate as buy and none rate as sell.

Buy-rated stocks

Buying single stocks is risky, sure, but the hope is that some of the risk is mitigated by how positive analysts are, which should, in turn, make investors more positive. That should push share prices up – or at least keep them from falling too dramatically.

Analyst ratings work both ways, though, so you’ll probably also want to avoid those stocks with the highest proportion of sell ratings: the biggest names include American Airlines, Juniper Networks, and Clorox.

Sell-rated stocks
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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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