Investment Contrarians

The S&P 500 Companies to Watch This Earnings Season

By for Investment Contrarians |

S&P 500 Companies to Watch This Earnings SeasonIt’s almost that time again, corporate earnings season. Starting next week, American firms begin reporting their corporate earnings for the first quarter of 2013. Considering how high the S&P 500 is, many analysts and investors will be closely watching the results.

According to estimates from Bloomberg, earnings for the S&P 500 firms are expected to drop by 1.9% for the first quarter. This represents the first decrease in corporate earnings since 2009. (Source: Rupp, L. and Gammeltoft, N., “U.S. Stocks Fall as Energy, Financials Tumble on Economy,” Bloomberg, April 3, 2013.)

We’ve seen a decrease in estimates for earnings just over the last couple of months. In January, according to Bloomberg, the average corporate earnings estimate by analysts for S&P 500 companies was a growth of 1.2% for the first quarter. This follows the fourth quarter of 2012, in which corporate earnings for these companies grew by eight percent.

According to FactSet Research Systems Inc., so far for the first quarter 2013, 86 S&P 500 firms have issued negative earnings guidance, while 24 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research System, Inc. web site, March 28, 2013.)

With one-year forward earnings estimates at $114.08 for the S&P 500, this makes the forward price-to-earnings (P/E) ratio 13.7. This certainly doesn’t make the market expensive, but it’s not cheap either. To put this in context, historically, the trailing P/E ratio is usually in the range of 10 to 25, with certain periods both below and far above this range.

One sector to watch out for is technology, which according to FactSet is predicted to have corporate earnings drop by 3.7% for the first quarter, a significant downward revision from earlier corporate earnings growth estimates of 1.3%. Semiconductor firms, specifically, are expected to report weak corporate earnings.

The only sector of the S&P 500 that has not had to lower estimates for its corporate earnings is the financial sector. Estimates for the financial sector within the index increased slightly over the past couple of months to a 3.1% increase in corporate earnings for the first quarter of 2013. However, many financial firms have moved up substantially, and any miss in corporate earnings will most likely result in a decline in share price.

The materials sector of the S&P 500 is estimated to have earnings growth of only 0.2%, a substantial decrease from earlier corporate earnings growth estimates of seven percent at the beginning of the first quarter.

Most analysts do expect a significant pickup in earnings for the S&P 500 companies in the second half of 2013. According to research conducted by FactSet, these companies are expected to report corporate earnings growth for third-quarter 2013 of 10.1% and fourth-quarter 2013 of 15.6%.

With the index at such lofty levels, not only will the current earnings reports be important, but the guidance for the remainder of the year will be far more valuable.

If the S&P 500 companies as a whole state they are positive for the remainder of the year, then the estimates for corporate earnings growth in the second half might be accurate, which would mean significant growth in the second half of 2013.

Of course, there is much that could go wrong over the remainder of the year. I’m worried about a potential sell-off in the S&P 500 in late summer or early fall. This will coincide with my belief that, at that point in the year, rumors will begin to circulate about the Federal Reserve reducing monetary stimulus.

If that were to occur, a significant pullback in the S&P 500 would be a good entry point if earnings grow at the estimated levels currently being stated. Over the next few weeks we will learn more about what business leaders see as a probable environment for the second half of 2013.

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