PMC Weekly Review - July 24, 2015

An Upbeat Start to Earnings Season

In the first quarter of 2015 reported earnings per share (EPS) were $21.51 for the S&P 500 Index, representing a decline of 14.23% from the prior year. The Materials and the Industrials sectors were the worst performers, with year-over-year EPS declining over 40%. Although Utilities and Financials were bright spots, gaining 40% and 20% year over year, respectively, many corporations provided overall lower guidance, and Wall Street analysts lowered second quarter earnings expectations. Thomson Reuters’ data forecasted a 5.9% gain in earnings for Q2 in January for the S&P 500 Index, and by June these estimates were revised to a loss of 1.5%. Bob Doll of Nuveen Investments stated in a quarterly conference call earlier this week that second quarter earnings estimates were cut too far, in his opinion, and that many companies will exceed Wall Street consensus. So far, that holds true.

Corporate earnings releases kicked off unofficially on July 8th, when Alcoa (ticker: AA) reported solid second quarter profits. Through the market close on Tuesday, July 21st, 102 companies (roughly 20%) in the S&P 500 Index have reported earnings. Seventy percent beat earnings expectations, and 55% exceeded revenue forecasts. On the heels of a report that existing home sales were strong in June, reaching highs not seen since February 2007, it is no surprise that housing companies posted positive earnings. Specifically, Lennar Corp (ticker: LEN) reported $0.79 per diluted share, versus last year’s $0.61 per diluted share. Corporations that did not perform as well typically had revenue exposure overseas, and were hurt by a strong dollar, which reduces income derived outside of the US. Although the Technology sector posted year-over-year gains last quarter of 8.90%, tech companies surprised the market this week with lackluster earnings, with names like Qualcomm Corp (ticker: QCOM), Apple (ticker: AAPL), SanDisk Corp (ticker: SNDK), IBM and Microsoft (ticker: MSFT) missing expectations in one way or another. For example, Qualcomm reported a 47% decline in quarterly profits; Apple’s iPhone sales were lower than anticipated; SanDisk reported a drop in both revenue and profit; IBM’s operating EPS fell 13%; Microsoft earnings and revenue beat expectations, but had a loss for the quarter when previously disclosed restructuring charges were included.

Despite the soft spot in the Technology sector, the overall earnings season has started out well. In fact, we’re seen growth across Basic Materials, Consumer Goods, and Financials, with names like Bank of America (ticker: BAC) and Citigroup (ticker: C) beating expectations. Additionally, Walgreens Boots Alliance (ticker: WBA), Monsanto Co (ticker: MON), Constellation Brands (ticker: STZ), Darden Restaurants (ticker: DRI), and UnitedHealth Group (ticker: UNH) all posted EPS growth of 57%, 48%, 30%, 26%, and 15%, respectively. Should earnings continue to beat expectations, the US Equity market may extend its gains and even tolerate a future rate hike by the Fed.

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