NEW YORK, N.Y. – After fretting over a Greek bailout, a collapse in Chinese stocks and the timing of an interest rate increase, investors are hoping U.S. corporate earnings will bring more reassuring news this month.
Companies have started to report second-quarter results, and early announcements bode well for investors unnerved by worrisome headlines and a shaky U.S. stock market. Aluminum company Alcoa, one of the first big companies to report earnings, announced last Wednesday that its earnings edged up from a year ago. A day later, PepsiCo said higher sales from Frito-Lay helped its earnings beat expectations.
“It’s going to be refreshing to move away from headlines around Greece, China and Fed rate hikes and get back to the underlying fundamentals that should be driving stock prices,” said Michael Arone, chief investment strategist at State Street Global Advisors.
A lift is just what stock investors need.
Fears about Greece and China have shaken up the market this summer. The Standard & Poor’s 500 index edged down 0.2 per cent from April through June, the index’s first losing quarter since December 2012. Last week, the index closed down as much as 4 per cent from its all-time high on May 21.
For the year, things aren’t so bad. But the S&P 500’s 2 per cent gain so far is small compared to the same period the prior two years. The index surged 17.8 per cent through mid-July of 2013 and climbed 6.5 per cent over that same stretch last year.
Earnings results have grown every quarter since late 2009, supporting a bull market for U.S. stocks over the time.
For this quarter, companies in the index are forecast to report that earnings fell an average 4.5 per cent, according to data provider S&P Capital IQ. Much of that decline, though, is due to lower profits at energy companies, which have been hit by a collapse in the price of oil.
That outlook may seem dire, but earnings optimists are also counting on history. Companies have a habit of low-balling their forecasts, giving them an easier hurdle to clear when they report final results. Consequently, earnings often beat the predictions of Wall Street analysts.
For example, early forecasts for the first-quarter showed that companies would report a 3.2 per cent decline in earnings. Once all the numbers were tallied, earnings climbed 4.2 per cent.
Investors say that if energy companies are excluded, companies are in good health.
“To me the story is underneath the headline numbers,” said Darrell Cronk, chief investment officer at Wells Fargo Investment Institute. “You still have really good growth in a number of sectors.”
Earnings are expected to grow strongly for telecommuncations companies, as well as health care firms.
In the coming weeks, investors see three key issues as companies report second-quarter results:
The collapse in oil prices has hit energy companies hard. Second-quarter earnings are projected to slump 61 per cent from the same period a year earlier, making it by far the worst-performing industry. If energy companies are excluded from the mix, earnings for S&P 500 companies are forecast to rise 3.8 per cent.
Many investors are optimistic about companies that rely on consumer spending. That’s because hiring has steadily improved this year and there are signs that wages are edging higher. And while the slump in oil has hurt energy producers, it has also lowered gas prices, putting more money into shoppers’ pockets.
Earnings for the consumer discretionary sector, which includes Macy’s and Amazon, as well as entertainment companies Netflix and CBS, are expected to grow 6.1 per cent.
“The consumer has a bit more free cash,” said State Street’s Arone.
Sure, Greece has been in a drag on stocks in recent weeks. But the European economy was actually showing signs of strength before anxiety soared over Greece possibly leaving the eurozone — the group of 19 countries that share the single euro currency. Europe’s economy grew 0.4 per cent in the first quarter, its best performance since the second quarter of 2013. Growth in Europe was actually faster than in the U.S.
“The big question is Europe and are U.S. multi-nationals seeing any signs of a durable recovery there,” said David Lefkowitz, an executive director and equity strategist at UBS.
Investors will be eager to hear from companies whether the Greek crisis has had an impact on their business in Europe, he said.