Corporate earnings are the main driver of stock prices. Alcoa Aluminum kicked off the second quarter earnings season with a bang by reporting earnings of $0.18 per share. Revenue was $5.84 billion. The forecast was for earnings of $0.12 with revenue of $5.66 billion, so they beat their estimates handily.
That brings up a good question and one that I’ve wondered about from time to time. In the financial press, if a company reports earnings that are better than expectations, it is said that they beat the estimates.
If they report earnings that are right on or near the estimated number, it is said that their earnings were in line with expectations. If their earnings are a disappointment and are lower than the estimates, it is said that the company missed their earnings.
What I have been thinking is that if a company’s earnings are a big beat or a major miss, it might really mean that the analysts were off the mark, not the company that is reporting. Most companies do offer some guidance, but maybe we should start saying that the analysts missed their estimates instead.
Anyway, with the market near record levels, corporate earnings will be monitored closely for signs of continued growth in the economy. According to Thomson Reuters, second quarter profit growth for the S&P 500 is expected to be 6.6 percent, a 1 percentage point improvement over the first quarter’s growth rate. Earnings for the S&P 500 are expected to grow at a 3.1 percent rate.
Technology is forecast to be the strongest sector with projected growth of 12.4 percent, and financials are projected to be the worst with a negative growth rate of -1.8 percent.
Energy, materials and telecom are also supposed to log pretty good growth rates. The only other sector forecast to have a negative rate of growth besides the financials is the utility sector with a projection of -0.5 percent.
The Fed recently announced that their bond purchases, known as QE, or quantitative easing, will end this October as long as the economy stays on track. In the absence of the Fed stimulus, corporate earnings and other economic fundamentals will be very important for the stock market.
In the next couple of weeks, earnings season will be in full swing, and earnings and revenue growth will be very important to watch as the market may not be able to move much higher just by increasing the PE multiple alone.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.