Earnings Will Impact Sector ETF Prices

October 13, 2015

The third-quarter earnings season officially kicked off last Thursday with the release of profit figures from aluminum giant Alcoa. In the coming weeks, hundreds of companies will similarly report their earnings, giving investors and analysts plenty of material to pore over.

The third-quarter earnings season will set the tone for the stock market in these critical last few months of the year. Markets were pounded in August and September amid China-related speculation. Now, companies will be able to tell their side of the story. Has the slowdown in the world's second-largest economy significantly derailed the profit picture for U.S. corporations?

That question will slowly begin to be answered this week. A total of 35 companies in the S&P 500 will report in the period, including heavyweights like Wells Fargo, Intel, Johnson & Johnson and Honeywell.

Next week, 122 companies in the S&P 500 will report, followed by 168 companies the week after. By the start of November, it will become increasingly clear whether the market's recent fears were unfounded or not.

As of today, investors seem to be cautiously optimistic. The S&P 500 has recovered about half of its recent losses and is fractionally negative for the year. The coming earnings reports will likely dictate whether the index heads back to its all-time highs and pushes into the green for the year or slides lower again.

Earnings Decline Expected Again

For the S&P 500 as a whole, earnings are expected to decline on a year-over-year basis for a second-straight quarter. Based on current estimates, profits may drop 5.5 percent from last year after falling 0.7 percent in the second quarter, according to FactSet.

However, in recent quarters, companies have tended to beat the lowered analyst estimates, thus it is possible that third-quarter earnings may ultimately end up showing a smaller decline or even a slight gain compared with last year.

In any case, once again, the S&P 500's earnings woes stem from one area in particular: energy. Energy sector earnings are anticipated to drop 64.3 percent due to much lower oil and natural gas prices.

The earnings picture would look much better without energy, but it isn't the only sector projected to show a decline. Utilities, consumer staples, industrials and materials may also show negative year-over-year earnings growth.

The worst of the lot is materials, with a forecasted 18.5 percent decline, followed by industrials, with a 5.7 percent decline.

Source: FactSet

Find your next ETF

Reset All