We are coming to the end of the second quarter and in just a few short weeks we will be in the heart of earnings season. We have been starting to get a few early reports in (we define the second quarter as the fiscal period ending in May June or July) and the results have been extremely positive so far. Granted these firms are not a representative sample, but so far so good. The most noteworthy of the early reporters are four big investment banks, which blew earnings expectations out of the water.
The market will set itself up for the Earning season snapback. If there are significant earnings surprises it would be interesting period with so many stocks down. Zacks is anticipating a good Earning season.
However, as we enter the quarter, analysts are a bit on the cautious side with the median year-over-year growth rate expected in the S&P 500 at only 8.3%. That is a sharp slowdown from the 13.2% growth posted in the first quarter. Yet shortly before the first quarter reporting season started the analysts were only expecting 8.9% growth for that quarter. Positive surprises then simply overwhelmed disappointments by better than 3:1 and the actual growth was much higher than expected. It would not shock me at all to see that happen again in the second quarter. The three sectors with the highest expected growth for the quarter are Energy (38.3%), Industrials (16.0%) and Materials (14.3%). All three sectors are also continuing to see strong upward estimate revisions for both this year and next.
For all of 2006, earnings growth is expected to be very solid. The median expected growth rate among S&P 500 firms is 11.4%, and the strength is expected to continue into next year with 12.9% growth expected.
Those of you who have asked me a lot of questions about my earnings based strategy, the coming earning season might be a good time to keep a good eye on how the market behaves during the earning season. It is also a good time to build your own earnings database. One good online source of earnings data is this Wall Street Journal section. The Investors Business Daily is another good source of daily earnings releases. But they do not cover lot of foreign stocks traded on US exchange.
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