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The Q2 earnings season is gradually unfolding. As of Jul 25, 128 S&P 500 members came up with earnings results. Total earnings for these companies are up 7.0% from the same period last year on 4.2% higher revenues. 77.3% of the companies beat EPS estimates while 70.3% topped revenue estimates.

It is going to be another busy week with nearly 800 companies – including 183 S&P 500 members – expected to come up with earnings results. Combining results of the reported index members (97 members till Jul 21) with the remaining 403 members of S&P 500, earnings are estimated to improve 8.6% on 4.7% higher revenues.

Let us now focus on the utility sector, which is characterized by its defensive nature and domestic orientation. Earnings are expected to drop 2.9% this season.

The utility sector is capital-intensive. These companies need huge capital to set up generation facilities, and transmission and distribution infrastructure. They also require considerable funds to maintain and upgrade the existing systems in order to meet emission-control standards. Utilities have been benefiting from the rock-bottom interest rate environment. However, the Federal Reserve has raised the rates twice in 2017 – in March and June. This will definitely hurt the utilities. The Fed has maintained its forecast for one more rate hike in 2017.

With the rising interest rates, the stable, regular dividend payer utilities will face strong competition from bonds as these provide higher returns, which will make them a more attractive option for the investors.

The U.S. coal-based utilities got a respite with President Trump’s decision to repeal the Climate Power Plan. Moreover, Trump has walked out of the Paris Climate Agreement.    

Five out of the 16 sectors in the Zacks coverage universe are expected to witness an earnings decline this season. Read more details in our weekly Earnings Outlook.

Let’s take a look at a few utilities that are scheduled to report quarterly numbers on Jul 27.

FirstEnergy Corporation (FE - Free Report) reported a positive earnings surprise of 9.86% in the previous quarter. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FirstEnergy’s Earnings ESP is +3.28%. This is because the Most Accurate estimate stands at 63 cents, higher than the Zacks Consensus Estimate of 61 cents. According to our proven model, stocks with the combination of a positive ESP and a Zacks Rank #1, 2 (Buy) or 3 have increased chances of beating estimates.

The company is likely to beat earnings because it has the right combination of the two key ingredients (read more: What's in Store for FirstEnergy This Earnings Season?)

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Edison International (EIX - Free Report) reported a positive earnings surprise of 23.60% in the previous quarter. The company currently carries a Zacks Rank #3.

Edison International’s Earnings ESP is -6.02%. This is because the Most Accurate estimate is pegged at 78 cents, lower than the Zacks Consensus Estimate of 83 cents.

Hence, the company is unlikely to beat earnings as it does not have the right combination of the two key ingredients (read more: Edison International Q2 Earnings: What's in the Cards?)

PG&E Corporation (PCG - Free Report) reported a positive earnings surprise of 27.71% in the previous quarter. The company currently carries a Zacks Rank #3.

PG&E Corporation’s Earnings ESP is +5.06%. This is because the Most Accurate estimate stands at 83 cents, higher than the Zacks Consensus Estimate of 79 cents.

Hence, the company is likely to beat earnings as it has the right combination of the two key ingredients (read more: PCG - Free Report) %20to%20Report%20Q2%20Earnings:%20Is%20a%20Beat%20in%20Store?">PG&E Corp to Report Q2 Earnings: Is a Beat in Store?)

American Electric Power (AEP - Free Report) reported a negative earnings surprise of 1.03% in the previous quarter. The company currently carries a Zacks Rank #3.

American Electric Power’s Earnings ESP is -6.90%. This is because the Most Accurate estimate stands at 81 cents, lower than the Zacks Consensus Estimate of 87 cents.

Hence, the company is unlikely to beat earnings as it does not have the right combination of the two key ingredients (read more: Will American Electric Disappoint This Earning Season?)

Xcel Energy Inc. (XEL - Free Report) reported a negative earnings surprise of 6.0% in the previous quarter. The company currently carries a Zacks Rank #3.

Xcel Energy Inc. Price and EPS Surprise

Xcel Energy Inc. Price and EPS Surprise | Xcel Energy Inc. Quote

Xcel Energy’s Earnings ESP is +2.38%. This is because the Most Accurate estimate stands at 43 cents, higher than the Zacks Consensus Estimate of 42 cents.

Hence, the company is likely to beat earnings as it has the right combination of the two key ingredients (read more: What's in Store for Xcel Energy This Earnings Season?)

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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