The U.S. earnings season kicks off Thursday with JPMorgan and, according to analyst earnings revisions, semiconductors, retail and banking stocks are the hottest sectors heading into the latest cluster of quarterly results. We take a deeper look at specific companies driving the biggest improvements in sector outlooks.
The U.S. energy sector is expected to increase profits by a factor of six in year-over-year terms, but a look at shorter term changes in forecasts provides a whole different list of top performers. The bar chart immediately below includes the five best and worst S&P 500 industry groups according to the percentage change in earnings estimates during the past three months. The energy sector is among the worst sectors by this measure.
The semiconductor sector has seen the biggest improvement in terms of profit outlook in the past three months with estimates climbing 7.3 per cent. Retailing, ranked second, is a huge surprise: Business media have been filled with reports of the "retail apocalypse" and yet analysts have been raising earnings expectations.
Bank stocks, software and technology hardware round out the list of most improved market sectors.
Micron Technology Inc. and Applied Materials Inc are driving positive earnings revisions in the semiconductor sector, as the table below shows. Analysts have more than doubled profit expectations for Micron and, on a total return basis, the stock has jumped 27.5 per cent so far in 2017. Applied Materials has seen a 23.7-per-cent jump in earnings expectations (an increase of 15 cents a share [U.S.] for the current year) and the stock is up more than 20 per cent, on a total return basis, year to date. Further down the list, analysts for graphics chip maker Nvidia have boosted the profit outlook by more than 10 per cent in the past three months, despite the stock's weak performance.
A closer look at U.S. retail stocks makes them far less interesting as a group. Much of the improvement in outlook comes from Netflix Inc., a company that could easily be classified in technology or telecommunications rather than retail, and even in that case things aren't quite as positive as they look at first glance. The 88.6-per-cent increase in projected earnings sounds impressive until we note that total earnings per share only increased by 21 cents. This leaves the forward price-to-earnings ratio at a still-stratospheric 99.7 times.
Lowe's is vaguely interesting for investors expecting a pickup in the U.S. housing market but the 2.6-per-cent improvement in profit forecasts is hardly monumental.
These screens were done with a specific purpose in mind – gauging short-term earnings momentum – and shouldn't be regarded as conclusive grounds for any buy or sell transactions. The slight downward profit adjustments on energy stocks, for instance, aren't that relevant when year-over-year earnings growth is expected to explode higher.
The strength in semiconductor and technology profitability is, however, potentially important and the topic is worth further study for investors.
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