With stock market in lull, investors pin hopes on earnings boom

Forecasts suggest U.S. corporations remained on strong footing heading into the second half of the year.

  • By Akane Otani and Michael Wursthorn,
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Corporate earnings are poised to extend a run of double-digit growth in the second quarter, providing a balm for a stock market that has languished as investors have grappled with threats ranging from fractious trade relations to tightening monetary policy.

Analysts expect earnings from S&P 500 (.SPX) companies to grow 20% in the second quarter from the year-earlier period, according to FactSet. Despite fears that earnings peaked in the first quarter, they are still on pace for the second-fastest rate of growth in nearly eight years. Revenue is also expected to impress, with projected growth of 8.7% from the year prior—the fastest rate since the third quarter of 2011.

The forecasts suggest U.S. corporations remained on strong footing heading into the second half of the year, even as investors contended with a number of potential obstacles. The continuing trade spat between the U.S. and China has taken a toll on shares of industrial conglomerates. Stocks have also struggled for momentum as the Federal Reserve has continued raising interest rates and winding down its massive bond-buying program—taking the levers off what has been a major support for the nine-year stock rally.

Through all that, U.S. corporations have managed to continue growing their earnings—even as the outlook outside of the U.S., including in the eurozone, Canada and Japan, has increasingly cooled. The U.S. is the only region where analysts are raising earnings estimates more than they are lowering them, according to Bank of America Merrill Lynch.

And of the 20 companies in the S&P 500 that have shared results so far, 90% have posted stronger-than-expected earnings, according to FactSet. That is a promising sign heading into the busiest period of the reporting season, which gets going in earnest on Friday as the biggest banks, including JPMorgan Chase & Co. (JPM), post results.

The buoyant outlook for earnings has some investors and analysts hopeful the numbers will help the market break out of a monthslong rut that has left the S&P 500 up just 4.1% for the year.

“Earnings season should refocus investors’ minds on stuff that’s important,” said John Thomas, chief investment officer of money-management firm Global Wealth Management. “We’re still optimistic strong earnings can help the year end on a positive note.”

Rallying oil prices, strong U.S. economic data and buoyant consumer confidence have pushed analysts’ earnings estimates higher since the start of the second quarter. This is a departure from previous quarters, when analysts typically lowered their expectations as they got closer to the start of the earnings season.

Much of the boost has come from the S&P 500’s energy sector, which has rallied as dwindling oil production in Venezuela and fears of a supply disruption in Iran have sent U.S. crude oil prices soaring above $70 a barrel again.

Energy companies in the S&P 500 are expected to post year-over-year earnings growth of 144% in the second quarter, up from 115% on March 31, according to FactSet. The upbeat outlook for profits has helped lift shares of oil companies; Exxon Mobil Corp. (XOM) gained 11% over the past three months and Chevron Corp. (CVX) is up 8.6% over the same time.

The S&P 500’s technology sector—the best-performing group in the broad index this year—is also expected to impress. Strong sales momentum has analysts forecasting double-digit earnings growth for firms in the semiconductor, internet software & services, technology hardware, storage & peripherals and IT services industries.

Those broadly positive sector forecasts have helped offset cuts in earnings estimates for consumer staples. Shares in that sector have slid in recent months as investors have worried that tariffs from Canada, Mexico and the European Union on goods ranging from orange juice to pork chops could dent profitability.

Analysts have lowered earnings estimates for about three-quarters of firms in the consumer-staples sector since March 31, including Campbell Soup Co. (CPB), Kraft Heinz Co. (KHC) and Coca-Cola Co (KO), according to FactSet. Shares of consumer-staples companies in the S&P 500 are down 9.1% for the year, placing them among the worst-performing sectors in the broad index.

Analysts warn any signs of trade tensions spilling over more broadly into the economy could weigh on stocks. Harley-Davidson Inc. (HOG) said in June that it was planning to move more of its production outside the U.S. to avoid EU tariffs on motorcycles.

CSX Corp. (CSX) said trade tariffs over a long period would tamp down economic activity, especially among domestic freight transportation companies. “A trade war is not a good thing,” said Frank Lonegro, chief financial officer of the railroad company, while speaking at an industry conference hosted by UBS Group AG.

Bank of America Merrill Lynch analysts said in a report that they would be closely watching corporate management’s guidance and commentary on earnings calls to gauge “any deterioration in outlooks driven by uncertainty around growth or trade, which could halt the [capital-expenditure] recovery and stall confidence.”

Analysts have already noted the stock market is rewarding companies less for beating earnings estimates. Companies that reported stronger-than-expected profits for the first three months of the year saw an average price increase of 0.2% two days before the earnings release through two days after, well below the five-year average of 1.1%, FactSet said.

That was the fifth consecutive quarter when S&P 500 companies that reported earnings beats saw average prices moves below the five-year average, FactSet added. Analysts attributed the lackluster rewards to high expectations heading into the reporting period and outside factors like a jump in interest rates and global trade tensions.

Firms are expected to post double-digit earnings growth through the rest of the year, but the disconnect between big profit gains and positive stock-price movements could widen, as investors come to grips with the likelihood that 2019’s earnings will be much more modest, analysts say.

“Sooner rather than later, the market is going to be thinking about earnings in 2019,” said Scott Wren, a senior global equity strategist with Wells Fargo Investment Institute. “The growth rate next year won’t be anywhere near where it will be this year.”

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