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US500: Earnings season kicks off this week

Summary:

  • Earnings season on Wall Street starts this week, we’re beginning with reports from JPMorgan (JPM.US on xStation5), Wells Fargo (WFC.US) and Citigroup (C.US) on Friday
  • Consensus suggests that all companies listed on SP500 (US500) will report an increase of revenue at 6.6% in Q2
  • US500 remains in an uptrend while 2400 pts. could serve as the nearest support

The earnings season on Wall Street kicks off this Friday. All companies which are listed on the US500 will be revealing their financial reports for Q2 2017 by the end of July. Investors look for a firm increase in profits which could retain US indices close to their historical peaks, however there are some question marks with regard to their performance in the past quarter.

Expectations assume that US companies will be able to report decent gains a third quarter in a row which is a positive change after a few months of losses. All companies listed on the US500 managed to increase EPS by 14% yoy in Q1 this year. A forecast for the second quarter points to a rise by 6.6% yoy. Keep in mind that anticipations usually underestimate real figures (forecasts were beaten by 4.2% on average over the last 5 years), hence profitability growth could achieve even a double-digit result.

link do file download linkInvestors expect that companies listed on the US500 will report a 6.6% increase in EPS for Q2, however expectations tend to be beaten, hence it could result in even better earnings. Source: Factset

While financial reports are relevant for stocks’ valuation, there were even more important issues in the last two years. It’s worth alluding to a situation where stocks were rising while their profitability just slightly improved in 2014 and 2015. On the other hand, recent two earnings seasons brought a breakthrough which came in at the same time when Wall Street kept going up. However, those gains were propelled by expectations regarding potential fiscal reforms which had been promised by Donal Trump. As a result, stocks were beefed up and those gains decisively exceeded an upturn in profitability. It led to noticeable increases of the P/E ratio which is almost at 22 as for now - more than 5Y (17.6) and 10Y (16.7) averages. Given that investors’ hopes for any massive fiscal stimulus coming from the Trump’s administration has faded away of late, the US indices could be prone to a corrective move. Hence, a worse than expected earnings season could trigger a sell-off.

link do file download linkIt appears that fresh peaks on the US indices are not fully justified by companies’ earnings. Source: Factset

When it comes to this season, investors’ focus will be especially on three sectors: financials, energy and information technology. There is guesswork that those sectors are to be the strongest within the whole index over the course of next two years. Meantime, some doubts have occurred whether companies from the three above-mentioned sectors are able to thrive as it’s forecast.

link do file download linkFinancials, energy and information technology are among sectors which are forecast to have the strongest impact on an increase of EPS in the US500. Source: JPMorgan

There were huge swings of moods with regard to technological companies in the last month which began a debate pertaining to a possible bubble in this sector. A forecast suggests that this sector is going to report a 10.5% yoy increase in profitability for Q2. However, it has to be recalled that semiconductor producers account for a massive share of that growth e.g. Micron Technology (MU.US). Stripping out that kind of firms a forecast would lower to 4.5% yoy.

Moreover, a perceptible uptick among energy companies have been caused mainly on the back of a rebound in oil prices and a huge wave of cost cuttings. Nonetheless, there was a heightened volatility of oil prices last quarter which could raise concerns whether energy firms have been able to keep prospering.

Main attention this week will turn on the financial sector as the three major institutions (JPMorgan, Wells Fargo and Citigroup) are scheduled to reveal their reports on Friday. There are projections that the whole sector will increase its profitability 6% yoy. However, those forecasts might be slightly overrated as a lion’s share of growth is forecast to come from insurance companies. Excluding those firms growth of earnings in this sector should come in at 2.8% yoy. In turn, banks could be a huge conundrum. There are numerous favorable factors which could portend well for earnings e.g. higher interest rates which could propel profitability or passed stress tests which banks were undergone by the Federal Reserve, it could result in higher dividends as well as larger buybacks. On the other hand, some CEOs of banks listed on Wall Street have warned recently that trading revenue could disappoint because there was no volatility on financial markets in Q2. Keep in mind that the lower volatility, the lower revenue from this segment.

link do file download linkThe nearest two weeks will be dominated by banks’ as well as big technological companies’ earnings. Source: Bloomberg, XTB

The US500 is moving within an upward channel, while 2400 pts. is the nearest support zone. This zone has been already tested several times and bulls have managed to defend it. Furthermore, in the vicinity of this zone there are two moving averages (50 and 75). On that account, one could assume that in order to break this support zone it needs to get a powerful impulse. On the other hand, if sellers are ultimately able to break it out, it could lead to a more noticeable pullback. The 150-moving average could constitute the next noteworthy support which is placed close to 2340 pts.

link do file download linkThe US500 is moving within a strong uptrend, hence there could be some hurdles to break a support located at 2400 pts. Source: xStation5

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