Earnings surprises may spark market rebound

Published Thu, Jul 9 20156:00 AM EDTUpdated Sat, Oct 14 201710:44 AM EDT

The unofficial start of the earnings season kicked off Wednesday after the bell, with Alcoa reporting second-quarter results. As has been the trend this year, analysts once again appear to have set the bar of expectations too low, leaving room for companies to potentially beat estimates and subsequently see their shares rise. "While consensus expectations point to a dismal earnings season, we believe the underlying growth trend is far healthier," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. S & P 500 companies are projected to show a drop of 3 percent in earnings growth in the second quarter, while revenue is expected to contract by 4 percent, according to Thomson Reuters I/B/E/S. Analysts predict the brunt of the decline will come from energy stocks, which have struggled to cope with a 50 percent plunge in oil prices in the past year. "While we generally prefer not to exclude certain groups, the energy sector and big five banks tend to be the largest swing factors and often obfuscate the underlying trend," said Golub. Based on his estimates, removing both groups would result in core EPS growth of about 7 to 8 percent. Similarly, revenues would post a 1.9 percent increase. Source: Thomson Reuters On the contrary, as shown in the chart above, financials, consumer discretionary and telecom stocks are all predicted to show the largest growth in earnings, greater than 5 percent each. Golub believes that financials will benefit from easy comps due to litigation expenses last year, with higher-than-expected results rolling in early in the quarter. He recommends looking at large banks with trading operations due to the increased volatility last quarter and also lending organizations such as regional banks, which will benefit from an increase in net interest margins. Among consumer discretionary stocks, names like AutoNation , Home Depot and Lowe's should do well according to Golub. The health-care sector is also a group where the strategist sees broad strength. In terms of revenue expectations, technology tops the list with a projected growth rate of 3 percent. According to Golub, technology is a very concentrated story of success around Apple , Google and Facebook , while Microsoft and Visa are also part of the story. He is not so bullish on the rest of the names, especially "old tech." To the downside, he believes industrials will take a hit as the global economy grows at a slower-than-expected pace. Within the group, he says the only "bright spot" is airlines . Among all sectors, industrial stocks experienced the greatest negative revisions heading into the quarter, followed by consumer discretionary and utility stocks . Interestingly, energy saw the largest upside revisions, especially for Exxon Mobil , Valero Energy , ConocoPhillips , EOG Resources and Occidental Petroleum , according to data from RBC Capital Markets and Thomson Reuters. Read More China crash underscores risk for US investors Disclaimer

Scott Mlyn | CNBC

The unofficial start of the earnings season kicked off Wednesday after the bell, with Alcoa reporting second-quarter results.

As has been the trend this year, analysts once again appear to have set the bar of expectations too low, leaving room for companies to potentially beat estimates and subsequently see their shares rise.

"While consensus expectations point to a dismal earnings season, we believe the underlying growth trend is far healthier," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets.

S&P 500 companies are projected to show a drop of 3 percent in earnings growth in the second quarter, while revenue is expected to contract by 4 percent, according to Thomson Reuters I/B/E/S.

Analysts predict the brunt of the decline will come from energy stocks, which have struggled to cope with a 50 percent plunge in oil prices in the past year.