Trading CFD stocks – what’s in store on Wall Street this month?

As Wall Street prepares for earnings season to get underway, we consider what investors can expect from Q2.

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The S&P 500 and Dow Jones head into the second quarter reporting season close to record peaks, as bets the Federal Reserve will refrain from raising interest rates this year underpin strength in equity markets.

Three months ago, US companies under-promised and over-delivered. Earnings were poor but beat some extremely weak forecasts to help US indices cement a rebound from their February trough.

This time, S&P 500 earnings are expected to decline by 5.6%, according to FactSet.

“If the index reports a decline in earnings for Q2, it will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009,” the analyst group explained.

Guidance from companies is pessimistic – 81 companies had issued negative EPS guidance, versus 32 positive.

In terms of valuation, FactSet said the forward 12-month P/E ratio is 16.6, which is above the 5-year average (14.6) and the 10-year average (14.3).

Earnings Beat

 

The Q1 earnings season was a lesson for traders looking to trade on results. The downbeat projections were easily exceeded, delivering a shot in the arm to the share price of many companies, notably banks.

And the data bears this out as a longer term trend that could easily happen this time.

Over the past four years, says FactSet, the actual earnings reported by S&P 500 companies have beaten estimates by 4%. During this time, more than two-thirds (68%) of companies listed on the index have reported actual EPS above the mean EPS estimates on average.

With the index near a record peak with investors already expecting soggy earnings, better-than-expected numbers could spur the S&P 500 to new highs.

Sector watch

 

At 7.5%, Telecom Services is expected to report the highest earnings growth of all 10 S&P 500 sectors. Of the five companies in the sector, AT&T is forecast to lead the way, said FactSet.

Consumer Discretionary is forecast to report the second highest earnings growth at 6.4%.

Energy companies are set to report the largest year-over-year decline in earnings (-77.1%) of all ten sectors. The Materials sector is forecast to post the second largest year-over-year decline in earnings (-12.3%).

Despite the weaker earnings, there is a lot of optimism for this US index.

John Butters, senior earnings analyst at FactSet, says the aggregate of analyst forecasts suggests the S&P 500 will rise 10% over the next 12 months.