Recent weeks have seen escalating trade hostility between the United States and China. However, starting this week, corporate earnings, revenues and management outlook will determine the future course of the stock market. Analysts expect a strong Q2 earnings season, after solid jobs data spur a welcome shift in market narrative.
Energy players, materials, construction, industrial products, technology and financials are likely to record the highest year-over-year earnings growth. Thus, for the next few weeks, let us keep an eye on stocks from these sectors that are likely to make the most of the Q2 earnings season.
Q2 Earnings to See Double-Digit Gains
Investors look forward to the outset of the Q2 earnings season this week, when bigwigs like JPMorgan Chase & Co. (JPM - Free Report) , Citigroup Inc. (C - Free Report) and Wells Fargo & Company (WFC - Free Report) will be reporting their Q2 numbers. Notably, for the whole of S&P 500, results are expected to be impressive.
Total earnings for the S&P 500 companies are estimated to improve 19% from the same period last year on 8.2% higher revenues. Such an uptick will follow 24.6% earnings growth on 8.7% revenue improvement last quarter, marking the highest growth in almost seven years.
The gains are likely to be broad-based, with nearly all the sectors expected to report year-over-year earnings growth, except for autos and conglomerates. Around 11 of these sectors are likely to come up with double-digit growth.
What Will Drive Earnings?
Earnings are likely to rise mostly on strong economic data. The United States has been able to create 213,000 jobs in June; a sign that corporates are finding ways to fill positions despite the lack of skilled workers. Such upbeat hiring figures breezed past analysts’ estimates of 200,000 job additions.
Job gains were pretty broad-based, with white-collar jobs leading the way with 50,000 additions. From manufacturers, health-care providers to construction companies, all hired workers, a clear sign of a burgeoning economy.
The unemployment rate rose to 4% last month, but for a good reason. The jobless rate went up mostly because of around 600,000 people entering the labor force. This showed that more Americans are searching for jobs as they are easier to find.
The U.S. economy, in the meanwhile, is projected to expand in the second quarter at an annual pace of nearly 4% after a 2.2% gain in the first three months of this year, economists say. This would put the economy in a solid position this year to meet or even beat 3% growth in gross domestic product (GDP), one of the primary aims of the government (read more: US GDP to Hit Elusive 3% Annual Growth in 13 Years: 5 Picks).
The recent strength in the economy has offset trade war tensions. Needless to say, the United States and China have imposed tit-for-tat tariffs on each other’s imports, with Beijing accusing the United States for triggering the ‘largest scale trade war’ (read more: Think Small As U.S.-China Trade War Breaks Out! 5 Top Picks).
Potential Gainers of Q2
The energy sector is poised to record highest earnings growth among all sectors, which is estimated to surge 138.4% from the same period last year on 20.3% higher revenues. Among the sub-sectors, oil and gas exploration and production; oil and gas refining and marketing; oil and gas equipment and services; and oil and gas drilling companies are positioned to report solid growth. A more or less healthy crude pricing scenario and positive free cash flow are primarily fueling the optimism.
The materials sector has recently been looking up, with Q2 earnings expected to rise 54% on 24.1% higher revenues. Construction is likely to report the third-highest year-over-year profit growth, with Q2 earnings poised to be up 45% from the same period last year on 22.5% higher revenues.
Earnings for the Industrial sector are set to grow 24.5% from the same period last year on 10.9% higher revenues. Firm business investment helped factories expand, while manufacturers are also on a hiring spree and are paying more than other jobs.
Q2 earnings for the tech sector are poised to be up 23.8% from the same period last year on 10.7% higher revenues. High profits are also expected from financial segments as well. Total Q2 earnings for the financial sector are projected to rise 18.4% from the same period last year on 3.8% higher revenues. Banks, insurers and asset managers are all expected to report double-digit growth mostly on higher interest rates (read more: Fed Lifts Rates for the Second Time in 2018: Winners & Losers).
Buy These 6 Stocks for Stellar Earnings Growth
A very strong economic backdrop looks set to deliver another round of stellar earnings growth in Q2. This calls for investing in companies from the aforesaid sectors, which are expected to report a significant uptick in Q2 earnings.
These six stocks have a positive Earnings ESP. This is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
These stocks, in the meanwhile, also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
ConocoPhillips (COP - Free Report) explores, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids. The stock has a Zacks Rank #1. The company’s expected growth rate for the current year is 595%, way ahead of the industry’s gain of 15.7%. The company is expected to report earnings results for the quarter ending June on Jul 26. ConocoPhillips has an Earnings ESP of +7.26%.
Domtar Corporation (UFS - Free Report) designs, manufactures, markets, and distributes various communication papers, specialty and packaging papers, and absorbent hygiene products in the United States, Canada, Europe, Asia, and internationally. The stock has a Zacks Rank #1. The company’s expected growth rate for the current year is 39.2%, higher than the industry’s gain of 26.2%. The company is expected to report earnings results for the quarter ending June on Jul 27. Domtar has an Earnings ESP of +4.11%.
Foundation Building Materials, Inc. (FBM - Free Report) distributes building products in the United States. The stock has a Zacks Rank #2. The company’s expected growth rate for the current year is 62.9%, higher than the industry’s gain of 25.2%. The company is expected to report earnings results for the quarter ending June on Aug 2. Foundation Building Materials has an Earnings ESP of +21.05%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Atkore International Group Inc. (ATKR - Free Report) manufactures and distributes electrical raceway products in the United States and internationally. The stock has a Zacks Rank #1. The company’s expected growth rate for the current year is 73.2%, higher than the industry’s gain of 26.1%. The company is expected to report earnings results for the quarter ending June on Aug 14. Atkore International has an Earnings ESP of +1.49%.
Etsy, Inc. (ETSY - Free Report) operates Etsy.com, a commerce platform to make, sell, and buy goods online and offline primarily in the United States. The stock has a Zacks Rank #2. The company’s expected growth rate for the current year is 31.6%, higher than the industry’s gain of 16.9%. The company is expected to report earnings results for the quarter ending June on Aug 2. Etsy has an Earnings ESP of +13.33%.
Berkshire Hathaway Inc. (BRK.B - Free Report) provides property and casualty insurance and reinsurance, as well as life, accident, and health reinsurance; and operates railroad systems in North America. The stock has a Zacks Rank #2. The company’s expected growth rate for the current year is 50.2%, higher than the industry’s gain of 24%. The company is expected to report earnings results for the quarter ending June on Aug 3. Berkshire Hathaway has an Earnings ESP of +3.75%.
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