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Should Investors Be Worried about the Upcoming Earnings Season?

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Updated

FactSet data is not optimistic

We are in the midst of an elongated bull run. Analysts and investors remain cautious but several stocks continue to gain momentum and rise higher. The S&P 500 was impacted last year by concerns over the trade war, slowing macroeconomic conditions, as well as a semiconductor downturn. However, stocks have made a strong comeback in the first half of 2019.

The next key driver for stocks will likely be the upcoming earnings season. The guidance and revenue projections given by companies will give us a peek into the health of the economy. According to a FactSet report, 113 S&P 500 companies have issued earnings guidance for the second quarter of 2019, which ended in June 2019. 87 of these companies have issued negative guidance, while just 26 have positive earnings guidance. This data suggests that around 77.0% of companies who have issued guidance expect earnings to decline, which is higher than the five-year average of 74 companies in the second quarter but lower than the record of 92 companies in the first quarter of 2006.

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Technology sector will drive this earnings decline

Which sectors are likely to be impacted by this negative guidance? FactSet said, “Seven of the 11 sectors have seen more companies issue negative EPS guidance for Q2 2019 relative to their five-year averages. However, the Information Technology and Health Care sectors are the largest contributors to the overall increase in the number of S&P 500 companies issuing negative EPS guidance for Q2 relative to the five-year average.”

In the technology sector, 26 companies have issued negative earnings guidance, which is higher than the five-year average of 20.4. Semiconductor companies will lead this decline with nine companies expecting negative earnings as the downcycle continues to impact sales.

Companies with higher international exposure will be impacted

Though trade tensions have eased, the earlier tariffs that were imposed remain. The global economic growth is slowing, which will impact companies in the S&P 500 that have significant exposure to international markets.

FactSet first divided the index into groups. One is companies that generate the majority of sales in domestic markets while the other set includes companies that generate the majority of sales internationally. For companies with significant domestic exposure, the earnings growth was estimated at 1.4%, which fell to -9.3% for companies with the majority of sales coming from international markets.

Similarly, the revenue growth for the first group was estimated at 4.0%, while the second group is expected to report an average revenue fall of 1.2%. Generally, the tech sector has significant international exposure.

This data suggests that the US economy is still strong. But several stocks have exposure to international markets as well. The earnings season is less than two weeks away. It will be interesting to see how the market reacts to the expected decline.

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