2 Sectors To Watch As 1Q Earnings Season Hits Its Stride

2 Sectors To Watch As 1Q Earnings Season Hits Its Stride

As earnings season for the first quarter of 2016 ramps up, investors are not exactly anticipating stellar results. First quarter 2016 earnings for the companies in the S&P 500 are expected to be down approximately 9%, on average, compared to the first quarter of 2015. If that holds true, it would be the worst year-over-year decline since 2009.

While Horizon is not expecting miracles, we do believe that U.S. companies overall will post better financial results than many investors anticipate.

Our relatively positive outlook versus the overall market consensus is due to encouraging developments we see in a number of market sectors—which, taken together, could result in revenue and earnings surprises to the upside.

Here’s A Look At Some Key Developments In Two Important Market Sectors:

Financial Services. This was the worst-performing sector during the first quarter of 2016. However, we believe investors continue to view the sector too negatively. Certainly things like trading volume and investment banking were weak during the first three months of the year. But many core aspects of financial services companies’ businesses—such as consumer banking and lending—remain healthy. Last week, for example, Bank of America reported that net income in its consumer banking division rose 22% in the quarter. The sector’s earnings for the first quarter and going forward may surprise investors who overlook these core strengths.

Industrials. The large, multinational companies that make up the industrials sector have been hurt recently by relatively slow global economic growth and the rallying U.S. dollar. When the dollar rises in value versus other currencies, it makes U.S. products sold overseas more expensive—tamping down demand for those products. Investors have expected nothing but the worst for industrials in the face of those headwinds.

Recently, however, the dollar has begun to weaken. In the first quarter, for example, it fell by around 5% versus the euro. This decline is being driven in part by the Fed’s decision to remain “on hold” and cautious about raising short-term interest rates. (When rates rise, the dollar rallies—and vice versa.)

The falling dollar trend may not have a big impact on first quarter earnings because it began too recently. But it could very well act as a tailwind for the industrials sector’s results going forward—an outcome that many investors don’t yet fully appreciate, as evidenced by valuations in the industrials sector 17x versus 18x for the S&P 500) – the steepest discount to the S&P 500 since 2009.

 

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