Second-quarter results likely to show impact of strong dollar, energy sector woes

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Investors are about to be inundated with second-quarter earnings results that will continue to showcase a corporate America struggling with the ill effects of a surging U.S. dollar and pain in the energy sector.

Some 35 companies in the S&P 500 are expected to report results this week, and 239 by the end of this month. Alcoa and Pepsico were among the companies kicking off the earnings season last week.

Christine Short, senior vice president of media at financial estimates firm Estimize, said her firm expects negative growth on both the top and bottom lines, with earnings per share contracting 3.5 per cent from the same quarter a year ago and revenues declining 2.1 per cent.

The stronger greenback cut into profits of multinationals in the first quarter of this year and that impact will continue to be felt.

"It seemed as though every S&P 500 company was mentioning some sort of stronger dollar impact," Ms. Short said in an interview. "Thus far, about half the companies [that have reported] in the second quarter have still noted that they are seeing a hit to the bottom line because of dollar fluctuations."

The big five banks – JP Morgan Chase, Goldman Sachs, Wells Fargo, Morgan Stanley and Bank of America – are expected to report this week and into the next. The financial sector has the most companies in the index with 88, or roughly 17 per cent.

"We're arguably in the peak housing season right now, so we'll be looking at Wells Fargo as the largest U.S. lender to see how mortgage originations are shaping up," said Ms. Short. She adds investment bankers should do well on the strength of increased M&A activity, and pegs financials' earnings growth at 2.7 per cent and revenues at 5 per cent.

Earnings in the energy sector – which makes up 8 per cent of the index – are expected to be down 66 per cent year-over-year. Removing energy from the index, S&P 500 companies would see earnings expand by 3 per cent, Ms. Short said.

But the outlook for the energy sector has been on an upswing, with the sector seeing positive earnings revisions of late, noted Vincent Delisle, managing director of portfolio strategy at Bank of Nova Scotia.

Making up roughly 11 per cent of the index with 55 companies, health care is expected to see earnings growth of 13.5 per cent by Estimize's estimation. Recent developments, including the U.S. Supreme Court upholding the Affordable Care Act (Obamacare), have pushed health insurers toward consolidation, as illustrated by Aetna Inc.'s pursuit of Humana Inc. and Anthem Inc.'s bid for Cigna.

Mr. Delisle forecasts the health-care sector beating estimates easily, with an 11.4 per cent earnings gain this quarter.

Recent developments in China and Greece also loom large this earnings season. Just under 10 per cent of the index's sales come from Asia Pacific, with a large portion of that from China.

"China is more important to the S&P 500 multinationals than Europe is at this point," Ms. Short said. "Europe's been suppressed for a while, so they've [multinationals] expected that and the way they've offset that weakness is through China."

China's stock market was routed in recent weeks, sending retail investors into a tailspin as the government used its regulatory powers to prop it up.

"I think more than half the companies who have reported this quarter have talked about strengths out of China, how much they rely on it (for gross fees)," Ms. Short said. "Many companies such as General Mills are expanding some of their brands into China.

"This is a huge piece of business revenue, and depending on how things deteriorate here, it could really change how the second half of the year looks."