Q2 Earnings Season Set to Begin

Market Overview

Q2 Earnings Season

Happening Now

Lost in the ongoing turmoil over in Greece is the imminent start of the 2015 Q2 earnings season. Alcoa is set to report Wednesday, July 8, 2015 and unofficially kick off the two month time period over which the majority of the U.S.’s publicly traded companies will file their financial statements and hold conference calls with analysts. Prior to the financial crisis, stock returns were primarily driven by fundamentals, most notably earnings and earnings expectations, which are reported quarterly. However, it appears that since 2009 investor focus has been centered on geopolitical, and most recently Federal Reserve, activities with investors’ views on these areas expressed through risk-on/risk-off trading behavior. It should also be noted that given the expansion of profit margins over the past 6 years, which some strategists consider unsustainable, less focus has been given to earnings since, to some, they do not represent an accurate picture of a company’s financial health but rather short term cost cutting to boost the bottom line in certain cases. Perhaps with a resolution (of any kind) in Europe, and after the commencement of rate hikes by the Federal Reserve, enough uncertainties will be removed from the market and we will see a return of fundamentally driven analysis.

Despite the back seat earnings reports have taken as it relates to companies’ stock prices, other metrics such as revenue, or sales, can offer solid insights into a company’s health and future prospects. According to Factset, year-over-year (“y-o-y”) revenue declines for Q2 2015 are expected to be -4.5% which would mark the largest y-o-y fall in revenue since Q3 2009. Interestingly, Factset goes on to point out that seven of the ten sectors that make up the S&P 500 index are expected to show growth in revenue and if the energy sector is removed (which is expected to post a decline of -40.5%), sales growth for companies within the S&P 500 index would be a positive 1.7%.

This highlights the importance of diving deep into fundamentals when selecting equities or evaluating the stock market overall.

Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 7/02/15. Rates and Economic Calendar Data from Bloomberg as of 7/06/15.

Factset: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_7.2.15

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Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable.

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