Corporate Profits Seen Slowing in Second Quarter; Gains for Energy
Market pros will be looking closely at the tech sector in the upcoming earnings season, but for investors seeking a quick pop, they need look no further than the energy sector as oil prices remain at record levels.
Overall corporate earnings growth is expected to come in at about 4.4% this quarter, compared with first-quarter growth of about 8%, according to Thomson Financial.
While that forecast may be a far cry from the 18 straight quarters of double-digit earnings growth through the fourth-quarter of 2006, there are a number of specific areas of the market which should post solid returns.
Technology will be one sector that will be scrutinized this coming earnings season, says Marc Pado, chief market strategist at Cantor Fitzgerald.
"It's all about expectations and from that perspective, the market is most concerned about technology and whether it'll reflect economic growth as we expect," said Pado.
"I think what's really lagged and what is going to outperform is the semiconductors group," he added. "It's been building a base and lagging the market in the last six to nine months.
"When I look at the major semiconductor names, I think we're in for a good product cycle and we're going to see a real technology expansion," he said. "And that will pick up in the semis and then the semi equipment names and then spread to the other sectors."
Semiconductor bellwether Intel is set to report on July 17.
"What we're hearing out of the supply chain is that PCs are actually strengthening and cell phone handsets came out of a hole in the first quarter seemed to be doing much, much better," says Eric Ross, chip analyst at ThinkEquity Partners. "I think those two areas will lead us into growth second half of the year."
The analyst says Advanced Micro Devices could be one stock that surprises on the upside.
"They are gaining a back a lot more share than people realize from Intel," he says.
Energy Stocks in Focus
But Dan McMahon, head of listed trading at CIBC World Markets, says while tech will be in focus for many traders, he believes energy stocks will "absolutely" see increased attention this earnings season.
"In terms of the outperformers you have to look at energy with oil at 70 bucks a barrel," says McMahon.
Integrated oil giant Exxon Mobil reports quarterly results July 26.
Cantor Fitzgerald's Pado says refining outfits in particular, should see great earnings results, but with a caveat.
"I think they are a great earnings play but I wouldn't know about for the second half," he says. "They're going to be able to move off the earnings numbers but they are still so high priced that once they get the pop off the earnings numbers they should level off."
Bear Stearns is cautious towards the refining plays with a "market underweight" rating on independent refiners such as Valero and Frontier Oil, citing "moderating fundamentals" for 2007 and 2008.
"Our outlook is for a pullback in refining margins, stemming from a combination of seasonal effects, and moderating fundamentals," wrote analyst Nicole Decker, in a July 3 client note.
Healthcare Looking Healthy
Howard Silverblatt, senior index analyst at Standard & Poor's, expects overall earnings growth of 5.3%, although those numbers could be ratcheted higher as earnings season progresses.
"Given analysts' underestimating guidance in the first quarter, we would not be shocked or dismayed to see the 5.3% move up in the six numbers," Silverblatt says.
The S&P analyst says the healthcare sector may be one of the top performers in second quarter with "stellar" profit growth of 22.4%.
Credit Suisse recently maintained an "overweight" rating on U.S. pharmaceuticals, citing improved cost controls and the fact that the market has already priced in lower prescription drug prices.
In addition, Credit Suisse says drug pipelines remain strong despite a number of generic product launches. Analyst Catherine Arnold says Schering-Plough, Eli Lilly and Wyeth are three names with underappreciated drug pipelines.
Drug giant Pfizer will kick off Big Pharma's earnings season when it announces second-quarter earnings on July 18.
Still Bearish on Consumer Stocks, Homebuilders
But the consumer discretionary sector -- particularly homebuilding stocks -- are expected to continue to produce weak earnings, says Silverblatt, who expects earnings to decline 8.6% from the year-ago quarter.
"Everyone is looking at the homebuilders and at what point do they hit a bottom?," he says. "Everyone is, to some degree, bottom fishing, but earnings are not expected to be good for consumer discretionary."
And while Wal-Mart Stores and other major retailers posted lukewarm quarterly earnings in May and have seen meandering stock prices, some market strategists are predicting a second-half comeback.
In terms of second-half stories, Pado says slumping retailers could be one overlooked area that is set for a rebound in the back half of the year ahead of the back-to-school shopping season.
"We're in the middle of that drought and that's the right time to be investing in those names like the big department stores," says Pado. "Retail always does well in the August through October period so you have to do jump on that bandwagon early when nobody cares."
Peter Kang is a markets writer for CNBC.com. He can be reached at firstname.lastname@example.org.