Earnings Arrive Amid Worries
Stocks have slumped into earnings-reporting season, with downbeat economic news raising doubts about a projected second-half recovery in the economy. Consensus estimates also project a second-half recovery in corporate profits, so the guidance provided with June-quarter results will be crucial.
As a partial hedge, hold about 30% of equity portfolios in a short-term bond fund. Also, watch the averages, noting whether the Dow Industrials correct to 8,050 and the Dow Transports fall to 2,985 — levels that would mark one-third retracements of the post-March rallies. Finally, look for opportunities among reasonably valued growers exceeding expectations.
Spotlight on technology and financials
Operating earnings for the S&P 500 Index are expected to be down for the eighth straight quarter, with consensus estimates for the June quarter projecting a 36% decline from year-earlier levels. All 10 sectors of the S&P 500 are expected to post year-to-year declines, and drops of more than 40% are expected in the cyclical sectors of energy, financials, industrials, and materials.
The guidance provided with results will be crucial, as at least some of the rally since March reflects expectations of a turnaround in profits. As always, the market’s reaction to quarterly results will reveal whether results and guidance have met expectations. Among sectors, technology and financials seem noteworthy for several reasons:
• Of the 30 S&P 500 companies scheduled to report quarterly results from July 8 to July 17, 13 are from the technology or financial sectors.
• Technology and telecommunications services are the only S&P 500 sectors for which consensus June-quarter profit estimates have been revised higher over the last three months, while estimates for financials have dropped sharply.
• Technology has been this year’s best performer, while the financial sector has been the worst. Over the past three months, financials have performed best, while technology has been second-best.
• At more than 18%, technology has the biggest weighting in the S&P 500 Index. The financial sector (13%) ranks third, while health care (14%) ranks second.
Have analysts adjusted profit estimates enough to account for today’s weak U.S. economy? Are expectations of a fourth-quarter earnings rebound realistic? Has the rally since March left stocks vulnerable to disappointment? The reaction to June-quarter results, especially in the technology and financial sectors, will go a long way toward answering these questions.
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