At the onset of the Q2 earnings season, all eyes are on results from big S&P 500 companies to see how they have fared despite tariff and global economic woes.
Meanwhile, the earnings snapshot for the June quarter of 2019 is pretty dispiriting, per the latest Earnings Preview. This raises an obvious question about whether a tepid earnings outlook will mess up the rally of major indices.
Corporate Earnings Outlook Bleak
The S&P 500 index is expected to see year-over-year earnings decline of 3.3% in the quarter, worse than the prior quarter’s 0.2% earnings contraction. With this, the index is not only poised to see two consecutive quarters of earnings deterioration but also the worst earnings after the first quarter of 2018.
Out of the 16 Zacks sectors making up the elite S&P 500 index, earnings growth of eight sectors is expected to be negative. Of the eight Zacks sectors, Technology, Aerospace, Basic Materials, Construction and Conglomerates are projected to report a double-digit decline in year-over-year earnings. Some of the biggest S&P 500 stocks that are anticipated to see an earnings decline are Alphabet Inc. (GOOG - Free Report) , Apple Inc. (AAPL - Free Report) and General Motors Company (GM - Free Report) . The Zacks Consensus Estimate for these companies’ earnings calls for a year-over-year earnings decline of 2.3%, 9.4% and 21.6%, respectively.
Billions of dollars of tariffs have been affecting the profit margin of companies, including manufacturers, retailers and chip makers, as revealed by executives of the companies. Global economic slowdown has also been a concern.
A Drab Earnings Outlook May Not Disrupt Stock Rally
For the first time, the S&P 500 Index closed above 3000 last Friday. The major index also posted gains for five consecutive sessions to hit a new record on Jul 15. Moreover, the Dow Jones Industrial Average surpassed the 27000 benchmark for the first time last week and closed at its fourth record level of this year yesterday.
The stock market rally has been largely fueled by hints of an interest rate cut by Fed chair Powell as early as this month. This has boosted investor confidence as a rate cut will help the market combat the global economic slowdown and the U.S.-China trade tensions.
According to The Wall Street Journal, most analysts agree that the Q2 profit margin of some of the biggest S&P 500 stocks may contract on rising cost concerns. The source added that key social media firms are facing the brunt of escalating cost issues related to regulations and security. However, Credit Suisse expects that most of the profit margin-related concerns of key companies are temporary. The investment bank added that stocks will get a boost in the long run if the costs are related to investments.
Which Stocks to Consider?
Given the bleak quarterly earnings picture, which will probably have a transitory effect on the stock prices, is unlikely to derail the stock market rally. We have picked four major companies with a Zacks Rank #2 (Buy). The stocks are not only witnessing positive earnings estimate revision for 2019 but are also poised to beat the Zacks Consensus Estimate for earnings in the to-be-reported quarter.
Headquartered in Chesterbrook, PA, AmerisourceBergen Corporation (ABC - Free Report) is a leading distributor of pharmaceutical products to the global market.
Our proven model conclusively shows that AmerisourceBergen is likely to beat estimates in the quarter, results for which are scheduled for release on Aug 1. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) — for this to happen. Notably, the stock has an Earnings ESP of +0.92%. Moreover, over the past 60 days, AmerisourceBergen has seen positive earnings estimate revisions for fiscal 2019.
Alaska Air Group, Inc. (ALK - Free Report) , based in Seattle, WA, is a leading provider of air transportation services. The stock has an Earnings ESP of +0.68% and is likely to beat earnings estimate in the quarter. The results are slated to be reported on Jul 25. The company has also seen positive earnings estimate revisions for 2019 over the past 60 days.
Alexandria Real Estate Equities, Inc. (ARE - Free Report) is a real estate investment trust. The company, with an Earnings ESP of +0.15%, is likely to beat earnings estimate in the quarterly results, which are scheduled for release on Jul 29.
On top of that, for 2019, the stock has been witnessing positive earnings estimate revision over the past 60 days.
Headquartered in Dallas, TX, Kimberly-Clark Corporation (KMB - Free Report) is the leading manufacturer of personal care products. Over the past 60 days, the company has been witnessing positive earnings estimate revision for 2019. Moreover, the stock has an Earnings ESP of +0.10% suggesting a beat when it reports on Jul 23.
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