Earnings: Second quarter will not be the same as the first, but analysts don't believe it.
I've been noting the slowly improving picture for earnings in the first quarter, but it's the second quarter outlook that matters.
As we entered the earnings season a month ago, earnings for the S&P 500 were expected to be DOWN roughly 5 percent from the same period last year.
As of Monday, earnings are expected to be UP fractionally, according to Factset.
That's a roughly 6 percentage point turnaround, and it is a big number. It's well-known that analysts usually overshoot on earnings, and usually on the upside, but typically analysts overshoot by roughly 3 percentage points as we enter earnings season, not 6.
This time they overestimated in the wrong direction, and instead of three percentage points too OPTIMISTIC, they were six percentage points too PESSIMISTIC.
What happened? Analysts saw the huge decline in commodity prices at the end of 2014 and drastically took down earnings for the most commodity-sensitive sectors: energy, materials, and industrials.
But they made a mistake: they assumed commodity prices were in for a long-term decline, but that's not what happened. Major commodities like oil, copper and aluminum began bottoming in January.
Commodities in Q2
Crude oil (WTI) up 24%
Nickel up 15%
Copper up 6%
Aluminum up 4%
As a result, stocks in those three sectors have risen off their lows. Indeed, Energy and Materials are the two biggest sector gainers in the S&P 500 in the second quarter, up 5.2 percent and 3.7 percent, respectively.
Unfortunately, it looks like analysts have the same attitude they did in the second quarter as they did in the first—they are still too pessimistic and too slow to change their numbers.
Earnings are expected to be down 4.3 percent for the second quarter, and are still coming down. On March 31, they were expected to be down 2.2 percent.
OK, that's only a spread of two percentage points, but they are still coming down, even as stocks have recovered from the earnings worries.
Two lessons here:
1) When it comes to who you should be watching, watch the markets over the analysts.
2) It's true that low commodity prices—like low oil—are good for consumers, but higher commodity prices—wthin reason—are good for stocks overall, though certain sectors (airlines) will be negatively impacted.