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Q2 Likely to Show Strongest Earnings Since 2010: Top 6 Picks

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Second-quarter earnings season has commenced, which means investors are closely watching how corporate America performed in the three months ended June. The outcome seems to be quite encouraging, as U.S. companies are expected to see one of the strongest quarterly earnings season in almost a decade.

Strengthening economic growth and Republican-led tax cuts are widely expected to drive earnings estimates. U.S. and Chinese officials resuming talks over trade issues, in the meantime, helped calm nerves. After all, intensifying trade tensions pose a threat to corporate profits (read more: 5 Ultra-Safe Stocks to Counter Fresh Trade War Threats).

Energy players, materials, construction, industrial products, technology and financials are likely to record the highest year-over-year earnings growth. Thus, over the next couple of weeks, let us keep an eye on stocks from these sectors that are likely to make the most of the second-quarter earnings season. Here, we should also bear in mind that better-than-expected earnings performances generally lead to a rally in the share price.

Catalysts Behind Q2 Earnings

Second-quarter earnings for the S&P 500 companies are estimated to improve 19.1% from the same period last year on 8.2% higher revenues. Second-quarter earnings, hence, are poised to set a record after 2010. Such growth, however, will be slightly below 24.6% earnings growth on 8.7% revenue improvement seen in the first three months of the year.

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 (read more: Start of Q2 Earnings Season).

Earnings are likely to rise mostly on solid economic growth and Trump’s policies including tax cuts. Trump’s economy is also in good shape, with the United States creating 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 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 (read more: US GDP to Hit Elusive 3% Annual Growth in 13 Years: 5 Picks).

The tax overhaul policy is providing the much needed wherewithal to corporates. After all, the tax laws gave companies massive relief as they will now be paying between 8% and 15.5% instead of the earlier 35% for bringing back money held overseas.

Energy to See Highest Pickup in Earnings Estimates

The energy sector is poised to report 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 is primarily fueling the optimism. Needless to say, that oil went from than $50 a barrel a year ago to as much as $80 a barrel in recent times.

Other Potential Gainers of Q2

The materials sector has recently been looking up, with second-quarter earnings expected to rise 54% on 24.1% higher revenues. Construction is likely to report the third-highest year-over-year profit growth, with second-quarter earnings poised improve 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.

Second-quarter 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 expected from financial segments as well. Total second-quarter 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).

The table below shows the summary picture for the second quarter, in contrast to what was achieved in the first quarter.

These 6 Stocks Could Come Up With Blowout Numbers

Such promising numbers call for investing in companies from the aforesaid sectors, which are expected to report a significant uptick in second-quarter earnings.

These 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 also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Bonanza Creek Energy, Inc. (BCEI - Free Report) engages in the exploration, development, and production of onshore oil and related liquids-rich natural gas in the United States. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current year earnings surged 26.9% over the last 60 days.

The company is expected to report earnings results for the quarter ending June 2018 on Aug 14. Bonanza Creek Energy has an Earnings ESP of +19.53%.

Cleveland-Cliffs Inc. (CLF - Free Report) operates as an iron ore mining company in the United States. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings rose 13.4% over the last 60 days.

The company is expected to report earnings results for the quarter ending June 2018 on Jul 20. Cleveland-Cliffs has an Earnings ESP of +8.24%.

Foundation Building Materials, Inc. (FBM - Free Report) distributes building products in the United States. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings increased 1.8% over the last 60 days.

The company is expected to report earnings results for the quarter ending June 2018 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.

The Manitowoc Company, Inc. (MTW - Free Report) provides engineered lifting equipment for the construction industry in the Americas, and internationally. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings climbed 8% over the last 60 days.

The company is expected to report earnings results for the quarter ending June 2018 on Aug 6. Manitowoc Company has an Earnings ESP of +14.36%.

Mellanox Technologies, Ltd. (MLNX - Free Report) a fabless semiconductor company, designs, manufactures, and sells interconnect products and solutions. The stock currently has a Zacks Rank 1. The Zacks Consensus Estimate for its current-year earnings improved 6.6% over the last 60 days.

The company is expected to report earnings results for the quarter ending June 2018 on Jul 17. Mellanox Technologies has an Earnings ESP of +4.44%.

Atlantic Capital Bancshares, Inc. (ACBI - Free Report) operates as the holding company for Atlantic Capital Bank, N.A. that provides commercial banking products and services in the United States. The stock currently has a Zacks Rank 2. The Zacks Consensus Estimate for its current-year earnings advanced 5.4% over the last 90 days.

The company is expected to report earnings results for the quarter ending June 2018 on Jul 25. Atlantic Capital Bancshares has an Earnings ESP of +12.05%.

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