over 1 year ago • 3 mins
Record inflation, rising interest rates, and a growling bear market all shaped the second quarter, and companies are now set to tell investors if they’ve kept it together amid this unforgiving backdrop.
✍️ Connecting The Dots
The S&P 500 – the key US stock market index – fell 16% last quarter, meaning it’s now down nearly 20% for the year. Most sectors have struggled, but there are a few worth cherrypicking: energy stocks were down 6%, industrials fell by 16%, and materials and real estate stocks 17% each. It’s those four sectors that investors might be looking at hardest when companies lift the lid on their quarterly performance this month.
So it’s useful to take a step back and look at what analysts are forecasting for each of them. They’re expecting the energy industry to put in the most impressive showing, with profits predicted to be 215% up on the same time last year – hardly surprising given the rise in the oil price this year. And they’re expecting industrials, materials, and real estate firms’ profits to be up by a lower-but-still-respectable 27%, 14%, and 11% respectively. If only they had such high hopes for financials, utilities, and consumer discretionary firms: analysts think they’ll lead the second quarter’s profit declines, predicting a 21%, 10%, and 3% slump respectively compared to the same time last year.
All in all, then, analysts are expecting S&P 500 companies to report second-quarter profits that are 4.3% higher than the same time last year. And if they’re right, that’ll be the lowest earnings growth since the fourth quarter of 2020.
1. There’s an opportunity here.
If you’re looking to find stocks to invest in this earnings season, you’ll want to look at two factors: a sector’s recent share price performance, and the direction of analysts’ earnings estimates. Here’s what we mean: analysts have raised their estimates for US energy stocks’ quarterly earnings growth from 137% to 215%, even as those stocks fell 6% last quarter. And when earnings estimates and share prices move in opposite directions, investors might spy an opportunity if companies meet or beat those estimates. Similarly, US industrials and materials stocks fell 16% and 17% respectively last quarter as analysts’ estimates rose, suggesting an attractive risk-reward scenario there too.
2. Stock prices don’t always rise if it’s a beat.
Stock prices usually rise if a company reports better-than-expected results and fall if it comes up short, but it’s not always that simple. See, a popular trading strategy – “buy the rumor, sell the fact” – recommends buying stocks before an update, benefiting from the momentum as other investors buy in ahead of time, and selling to lock in profits right when the announcement is made. That means a company can beat expectations and still see its share price flatline or even drop off as investors “sell the fact”. So you’ll need to go into a company’s update with three things in mind: what investors are expecting, how those expectations might have changed before the update, and whether its stock price has risen or fallen to reflect those factors.
🎯 Also On Our Radar
When Micron announced a disappointing profit outlook earlier this month, investors might’ve thought the boom in demand for computer chips had turned into a bust. But Korean tech giant Samsung just revealed in a teaser of its update that it posted stronger-than-expected revenue last month, suggesting the dropoff in demand isn’t as bad as investors thought. That might be why they promptly turned to TSMC and gave the rival chipmaker’s shares a boost.
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.