Q2 Earnings Season Won’t Be as Ugly as Headlines Suggest

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All that really matters after Alcoa (AA) launches quarterly earnings season Wednesday is the future. After all, everyone already knows that the most recent three-month period was ugly. The important thing is that the upcoming S&P 500 results don’t shatter Wall Street’s belief that earnings per share and margin levels are set for new records in the second half of the year.

arrows earnings seasonAnalysts have expected aggregate S&P 500 profits and sales to fall significantly in the second quarter for some time. It’s not like the double-whammy of a strong dollar and weak oil prices is a new development.

Besides, as bad as overall S&P 500 bottom- and top-line results may be, it’s hardly a case of widespread weakness. This is not a recession-like scenario. Rather, disproportionately terrible results from energy companies will more than offset strength in a number of other sectors, particularly healthcare.

That said, here’s the bitter bottom line: Analysts expect both S&P 500 profit and revenue to fall 4.5% in the second quarter, according to data from FactSet. That’s the largest expected decline in earnings or sales since the third quarter of 2009, when the economy had just barely emerged from recession.

The difference this time around is that most of the damage is being done by a single sector. The energy companies in the S&P 500 are projected to report a whopping 60% drop in earnings on a 41% decline in revenue. Chalk that up to low oil prices (and a high dollar).

Healthcare Sector Will Save Earnings Season

The important thing is what S&P 500 earnings and revenue look like after stripping out the catastrophe that is the energy sector.

As FactSet notes, if the energy sector is excluded, the estimated earnings growth rate for the S&P 500 would jump to 2.2%, and the revenue growth rate would rise to 1.7%. That’s a huge swing from the aggregate decline of 4.5% that’s currently expected.

The S&P 500 is also projected to report pretty widespread strength. Of the 10 sectors, only three — energy, industrials and consumer staples — are expected to report year-over-year declines in earnings and revenue.

Among the other seven sectors, earnings and revenue growth will be a bit weak to robust.

To nobody’s surprise, the healthcare sector is projected to report earnings growth of 8.2% on a 6.9% gain in revenue. The remaining sectors should post EPS growth of anywhere from 0.4% to 4.6%, and top-line gains of 0.3% to 3.5%.

The contribution of healthcare and drag from energy should act on earnings and sales for the remainder of the year, but the final result is clearly bullish for stocks.

Indeed, analysts are looking for record level EPS to resume in the fourth quarter of 2015, FactSet says. Furthermore, the Street expects net profit margins to rise to record levels starting in the current quarter.

The push and pull of the healthcare and energy sectors might be distorting results, but underneath it all, S&P 500 earnings and sales are much better than aggregate results would have you believe.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/earnings-season-alcoa-preview/.

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