Earning trends

The Zacks earning trend commentary is out and their are some good pointers to where the action is likely to be for couple of quarters.

The emerging star with regards to estimate revisions is the Materials sector. The strength there is mostly among the metals companies, largely in response to record, or at least decades old highs, in metals prices. However the strength is not limited to the metals alone, as chemical and paper companies are also showing significant strength. For the first quarter, the sector is now expected to post median growth of 9.1%, while a month ago it was only expected to show 4.6% growth.

Estimates have turned up for the Financial Services sector, with the strength concentrated in the brokers and investment banks.

The estimate revision weakness we have been seeing over the last few weeks for the Energy sector for 2006 is starting to show signs of spreading to 2007, although on balance things are still positive for next year. However, oil prices have rebounded sharply over the last week and it will be interesting to see if things turn positive again as a result. Much of the weakness appears to be tied to lower natural gas prices and higher oilfield costs (i.e. higher day rates for drilling rigs).

The Consumer sectors are starting to show some signs of strength in estimate revision, moving back towards a more neutral position after having faced relentless cuts for many months. The Utilities sector has turned dramatically lower, although the big drop in the mean estimate appears to be mostly due to the weakness at DYN. However, the cuts seem broad based, and may be tied to the recent rise in long term interest rates. The Health Care remains sickly in terms of estimate revisions for both years. Looking at the S&P as a whole, on balance things are positive for both 2006 and 2007, although revisions for 2007 continue to be stronger than for 2006.

Pay close attention to the estimate revisions, since they are a much better predictor of stock market performance than growth rates are. Overweight sectors with rising estimates and underweight those will falling estimates.