The earnings season kicked off with a thud from aluminum maker Alcoa (AA), which missed on the top and bottom lines. The company’s management is updating its global outlook in key areas:
|
2016 Global Growth |
Outlook |
Prior |
|
Automotive |
1 to 4% |
1 to 4% |
|
Commercial Transportation |
Flat to 2% |
-4 to 1% |
|
Packaging, Building and Construction |
2 to 3% |
1 to 3% |
|
Industrial Turbines |
2 to 4% |
2 to 4% |
It should be noted that the company sees China strengthening in the demand for autos and buses while the building boom around the world continues with a demand up to 6%. As for the earnings implication, the Street was already sobering to the notion of another quarter of year-over-year decline in earnings.
Bracing for Rough Season
According to FactSet, S&P 500 sales will increase 2.5%, but earnings are looking to be down 2.4%. Three months ago, the estimate was that sales were up 2.2% with a slight increase of 0.4% in earnings. However, the story is obviously deeper than that and we should look at individual sectors; here are the winners:
|
Utilities |
+5.8% |
|
Consumer Discretionary |
+4.9% |
|
Healthcare |
+3.7% |
|
Consumer Staples |
+2.4% |
|
Materials |
+1.9% |
|
Information Technology |
+1.7% |
|
Financials |
+1.1% |
These are the sectors bracing for a rough ride:
|
Energy |
-71.5% |
|
Industrials |
-8.6% |
|
Telecommunication |
-1.9% |
|
Real Estate |
-1.4% |
So, when market skeptics look at the trend of lower year-over-year earnings (see below), it’s understandable that they would wonder why the market is higher; and they’ll certainly brace for it to tumble.
On that note, I continue to say the market is slightly overvalued, making this more of a stock-picker’s market, which shouldn’t be confused with buying ‘cheap’ stocks. It’s a term that has a myriad of different meanings and has led to a myriad of losses for folks looking for false value.
The long-term earnings trend suggests a rebound soon, possibly even in this earnings season.
Key market support points:
- Dow Jones 18,100 to 18,000
- S&P500 2,100 to 2,000
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