By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Investors will get an early
preview on whether corporate America backs a rosier economic
picture this week as key players in the S&P 500's two largest
sectors -- tech and financials -- report quarterly results.
Of the seven Dow Jones Industrial Average (DJI) components
reporting this week, four represent the tech or financial sectors.
Similarly, roughly half of the S&P 500 Index (SPX) companies
reporting earnings this week fall either in the tech or financial
camp.
While some may argue the bar is always lowered for companies
leading up to earnings season, performance expectations are higher
than usual following the pass investors gave many companies in the
weather-beaten first quarter and stocks trading near record-high
valuations.
Stocks are coming off a rough week with the Dow industrials
finishing down 0.7%, the S&P 500 off 0.9%, and the Nasdaq
Composite Index (RIXF) declining 1.6%. Even though Federal Reserve
minutes revealing the central bank will end monthly bond purchases
in October provided some lift, other factors including renewed
worries about Portugal and a selloff in so-called momentum stocks
put pressure on markets.
Second-quarter earnings growth for the S&P 500 stands at
4.6%. If the average "beat" over the past four years applies to
this season, we could be looking at 7.7% growth by the end of the
season, notes John Butters, senior earnings analyst at FactSet.
Earnings, however, will still take a back seat to other
factors.
Show me the outlook (and revenue)
"It's cliche but true...it's all about the guidance," said
Nicholas Colas, chief market strategist at ConvergEx. Also,
earnings "beats" will continue to be taken with a grain of salt in
favor of revenue growth, which is seen by many as a more accurate
metric of corporate health amid accounting tricks and stock
buybacks.
Lately, negative guidance, while still high, has been on the
decline. Seventy-six percent of S&P 500 corporate outlooks are
negative for the second quarter, compared to the 66% five-year
average, according to Butters. Still, that's well below the 84%
seen in the first quarter of 2014 and the 88% in the fourth-quarter
of 2013.
Colas expects the standard 65% to 70% of companies to "beat"
earnings estimates this season. Other investors have grown
accustomed to this and that throws much more light on how companies
have grown revenue, he said. Even so, not much is expected in that
area this quarter with most analysts banking on more revenue growth
in the second half of the year.
That's evident in how revenue growth has fallen short even while
earnings manage to move forward. Even with expected 4.6% growth in
earnings for the S&P 500, revenue is only expected to rise 2.7%
in the second quarter.
Tech: The biggest cog in the market to set the tone
With the largest total market cap of the S&P 500's 10
sectors at $3.95 trillion, this week will be a busy one for tech
earnings right out of the gate and give investors an early preview
of how the second quarter fared against the weather-beaten first
quarter.
Tech companies are expected to see above-average growth compared
to the rest of the S&P 500 at 7.3%. The largest cap tech
earnings this week come from Google Inc. (GOOGL) (GOOG) on
Thursday.
Other highlights this week include Dow components Intel Corp.
(INTC) on Monday and International Business Machines Corp. (IBM) on
Thursday. Other S&P 500 tech companies reporting earnings
include Yahoo Inc. (YHOO) , eBay Inc. (EBAY) , SanDisk Corp. (SNDK)
, and Alliance Data Systems Corp. (ADS)
"Tech is one of those wonderful indicators," Colas said. "In
aggregate, it's a great barometer of overall growth." The sector
shows a balanced picture by cutting across both consumer and
business spending with continuously updating product cycles, he
said.
Financials to provide the big counterpoint
While tech is seen as an above-average performer this earnings
season, financial stocks, the second-largest sector by market cap
in the S&P 500 at $3.01 trillion, are also expected to be the
worst performer of the ten.
Wells Fargo & Co. (WFC) earnings on Friday showed the bank's
net interest margin narrowed and mortgage business slowed even
though it posted a 3.8% rise in net income. Shares finished
slightly lower after the report.
The floodgates on bank and financial earnings, however, are
thrown wide open this week as a dozen major financial companies
disclose their latest numbers.
Citigroup Inc. (C) reports results Monday. Dow components J.P.
Morgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS)
report results on Tuesday.
On Wednesday, Bank of America Corp.(BAC) , BlackRock Inc.(BLK) ,
Charles Schwab Corp. (SCHW), Northern Trust (NTRS) , PNC Financial
Services Group Inc. (PNC) , and U.S. Bancorp. (USB) report.
Thursday sees reports from Capital One Financial Corp. (COF) ,
Fifth Third Bancorp (FITB) , and Morgan Stanley (MS) among
others.
Financial companies are expected to see a decline in earnings of
3.9%. It's the only sector out of ten expected to see an overall
decline, and would mark the second-consecutive quarter decline in
earnings for the sector, according to Butters. Revenue for the
sector is only expected to grow by 0.7%.
Healthcare, Industrials also make an appearance
The remaining Dow components reporting this week include Johnson
& Johnson Inc. (JNJ) on Tuesday; UnitedHealth Group Inc. (UNH)
on Thursday; and General Electric Co. (GE) on Friday.
Other notable earnings reports this week include Textron Inc.
(TXT) , Abbott Laboratories (ABT), Safeway Inc. (SWY), Yum Brands
Inc. (YUM), Philip Morris International Inc. (PM), Honeywell
International Inc. (HON) , and Schlumberger NV (SLB)
Here's what some of the Wall Street houses reporting this week
have to say about earnings season for the broader market:
Goldman Sachs, in addition to pointing out 22 stocks that are
likely to beat earnings expectations this season, said it will be
looking out for less uncertainty from company managers, which
should boost capital expenditure and mergers and acquisitions
spending. Also, look for companies where analysts have lowered
earnings analysts during the quarter. Those companies are more
likely to miss those estimates, compared to those companies where
analysts have not changed or raised estimates, the firm said.
Morgan Stanley also wants to hear from management on how
consumer and industrial demand has improved and how higher oil
prices might translate into costs. The firm, however, is less
optimistic on a big rebound in capital expenditure spending any
time soon.
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