And just as quickly as the last one came to an end, another earnings season is upon us. Today, Alcoa Inc (NYSE:AA) will report and unofficially kick off the third quarter season. It will be hard for investors not to make comparisons to last quarter, the first in nearly three years to see companies within the S&P 500 post double-digit earnings growth. Will the strength from Q2 continue, or will we start to see a softening of U.S. corporate performance in the second half of the year?
The Estimize community seems to believe stellar earnings growth will continue into Q3, as the current aggregate estimate for the S&P 500 is 9.1%. All 10 sectors are expected to improve this quarter both on the top and bottom-line.
The two biggest estimated leaders of earnings growth this quarter also happen to be the biggest laggards as far as sales growth is concerned. Energy and Materials are looking for growth of 14.6% and 12.7%, respectively. Despite high estimated profit growth for Energy, revenues for the sector stand at a very low 0.3%. This shouldn’t come as a complete surprise, as Brent Oil is down 15% this year, even dropping below $90/barrel last week. In the year-ago quarter, Crude Oil got as high as $116 at the end of August 2013. It appears some degree of cost cutting has occurred to get the pop on the bottom-line.
For Materials, earnings growth is estimated to be driven by Metals & Mining (29.0%) and Construction Materials (22.1%), which seems like a positive foreshadowing for housing and commercial construction until you look at the revenue predictions of 1.6%. Just last week, construction spending for the month of August was released and showed a decline of 0.8%, after a rebound of 1.2% in July. Volatility in this data still paints a mixed picture and explains some of the lower sales expectations for the sector; new housing data out in the coming weeks should bring more clarity.
The defensive sectors are anticipated to continue to lag this quarter, with the Telecommunication Services and Utilities sectors looking for the lowest growth rates of 4.3% and 3.6%, respectively. There is never much of a story amongst the Telecom stocks as there are only 5 of them in the entire sector, and only Verizon (NYSE:VZ) is expected to post year-over-year growth this quarter. Utilities are taking a hit from Electric Utilities and Multi-Utilities, both with low single-digit profit expectations, which are dragging down the entire sector. Revenues look better at 7.5%, helped along by strength in the Independent and Renewable Electricity Producers.
There is no doubt that there will be plenty of themes amongst this season’s press releases. Some we’ll be looking out for: How is the stronger dollar impacting earnings? We’re sure to see some mention of this as nearly 50% of S&P 500 sales come from overseas. But we’d be reluctant to buy any excuse blaming the appreciation of the dollar as it’s too soon to see any real impact. Share buybacks, a hot topic from the first half of the year, may start to quell. Last season saw quarterly stock repurchases decrease to their lowest level in almost two years. And as companies lowered share buybacks, they put more of their money into capital expenditures, which hit their highest level in years, a more worthy use of corporate money from our perspective.
The season is still young, and only 21 companies have reported, 48% of those have beat the Estimize earnings estimate, 43% missed and 10% met. On revenues, 48% have beat and 52% have missed. This is compared to Wall Street estimates, of which 62% of companies have beat on the bottom-line, 29% have missed and 9% have met. For revenues, 62% of companies have beat the Wall Street estimate, while 38% have missed.
This week, seven more S&P 500 companies are scheduled to report: Monsanto (NYSE:MON), Costco (NASDAQ:COST), Alcoa (NYSE:AA), Safeway (NYSE:SWY), Family Dollar Stores (NYSE:FDO), Pepsico Inc (NYSE:PEP) and Fastenal Company (NASDAQ:FAST).