3 Things to Watch for During Earnings Q2 Earnings Season
Earnings season has gotten off to a nice start with shares of Netflix and Google both surging after they beat their earnings estimates. Even Philip Morris International, which is heavily exposed to currency risk, beat the street. As earnings season continues to unfold, investors will be scrutinizing corporate results as well as the stock market’s reaction. If earnings come in better than expected, the stock market may begin its long awaited second half rally. As the barrage of corporate earnings hit the tape, these are a few key things to watch for.
1) How will stocks react to earnings misses due to the stronger dollar?
The strong dollar has been a dominant theme in 2015 and investors have accordingly sold shares of companies who have large exposure to falling foreign currencies. A good example is Coca Cola shares, which are down aound 2.5% for the year at $41.38. Most investors know that $KO has large foreign exposure, so if the stock rallies or fails to decline further in the face of bad earnings due to the strong dollar, it may be a good indication that the market has factored in the bad news. This would help to alleviate some fear in the market and may help lead to a second half rally for the broader market.
A wide range of industries are affected by the dollar including Industrials, Materials, Energy and Consumer Staples. Every sector does not have to perform well to be a good signal for the second half rally to occur. However, if all of these sectors perform poorly, investors may send stocks down further leading to a correction.
2) Will Facebook and Apple continue to outperform?
The NASDAQ has been the clear outperformer in 2015 compared to the S&P 500 and the Dow Jones Industrial Average. The upcoming earnings season will be a good barometer for the sector. It will be interesting to see how Facebook and Apple perform after their earnings.
Facebook shares are near an all time high, and investors will eagerly listen to an update on new advertising formats including video ads, and updates on Instagram, Oculus and Whatsapp. If Facebook delivers good earnings, the NASDAQ may continue its charge higher.
Apple earnings will be highly anticipated as well, and investors will closely scrutinize iPhone 6 and 6 Plus sales, as well as information on new products such as the Apple Watch. If both of these technology bellwethers trade well after earnings, the stock market may begin a new leg higher.
3) Will Growth stocks continue to outperform value stocks?
Recent trends show growth stocks performing better than value stocks. This is the result of: rising interest rates, the strong dollar, and the anticipated pickup in US economic growth in the second half of the year.
Growth stocks outperforming value stocks is actually a good sign for the overall market because it is indicative of investors getting more comfortable with the sustainability of growth in the US economy. Among the sectors to watch for are Technology, Biotechnology and Consumer Discretionary. Specific growth names to keep an eye on are Facebook, Celgene, and Under Armour.
As the Q2 earnings season unfolds, it will be interesting to see if this trend continues.
Ideal Asset Management LLC is long shares of FB for it clients.
All of the ideas expressed in this article are the opinion of Ideal Asset Management LLC
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