The first quarter of this year is finally drawing to a close, calling for a quick recap of the show put up by the S&P 500. First and foremost, profit growth, one of the primary factors behind the current bull run, is well expected to remain robust for this elite index. What’s more, early estimates suggest that the earnings momentum will continue mostly on the Republican tax cut policy and solid global economic growth.
The energy sector is poised to report highest earnings growth among all sectors, with materials, industrial products and financials contributing the maximum. Thus, investing in fundamentally solid stocks from these sectors is a well thought-out strategy as these are likely to make the most of the Q1 earnings season. Here, we should bear in mind that better-than-expected earnings performances generally lead to a rally in the share price.
Q1 Earnings Expected in Double-Digits
Q1 earnings results are expected to be quite impressive. Total earnings for the S&P 500 companies are estimated to improve 15.9% from the same period last year on 7.3% higher revenues. Such an uptick will follow 13.5% earnings growth on 8.5% revenue improvement last quarter.
The gains are likely to be broad-based, with nearly all the sectors expected to report year-over-year earnings growth. Around 10 of these sectors are likely to report double-digit growth.
Earnings are likely to rise mostly on Trump’s polices, including tax cuts, repealing regulations and increased infrastructure outlays. Needless to say, economic growth remains solid both at home and abroad.
Multinationals Have an Edge
Higher global growth is actually a boon for multinationals during the Q1 earnings season. World Bank has estimated that the global economy will expand at a rate of 3.1% year over year in 2018. This comes on top of a promising 3% growth rate in 2017.
Lest we forget, trade war fears have abated. Both the United States and China have initiated discreet negotiations to expand American companies’ access to Chinese markets. He said that he has been talking to Chinese officials to prevent the situation from spiraling out of control.
Energy Sector Poised to Gain the Most
The highest year-over-year earnings growth is likely to be recorded in the energy sector, which is estimated to surge 65.7% from the same period last year on 15.4% higher revenues. Among the sub-sectors, oil and gas exploration and production; oil and gas refining and marketing; oil and gas equipment and services; and oil and gas drilling companies are positioned to report solid growth.
An uptick in oil prices and steady earnings comps are mostly cited to be the reasons for the elevated expectations. As per Factset, oil prices have averaged $62.61 so far in Q1 versus $51.78 in the year-ago quarter.
Materials Takes Second Spot, Industrials Next
The materials sector has recently been looking up, with Q1 earnings expected to rise 42.4% on 21% higher revenues. Industrials is likely to report the third-highest year-over-year profit growth, with Q1 earnings poised to be up 23.7% from the same period last year on 12.3% higher revenues.
Improving global economies and firm business investment helped factories expand at a record pace. Manufacturers are also on a hiring spree and are paying more than other jobs, reflecting sustained strength in the sector.
Financials Not Lagging Behind
Financial sector, in the meanwhile, is expected to rise double digits. Total Q1 earnings for the financial sector are projected to rise 18.7% from the same period last year on 4% higher revenues. Banks, insurers and asset managers are all expected to report double-digit growth as Fed raised benchmark lending rates for the first time this year.
At the conclusion of the FOMC meeting on Mar 21, Jerome Powell-led Federal Reserve hiked interest rates by a quarter-percentage point and projected a steeper path of rate hikes in 2019 and 2020, citing a healthy economic outlook. The vote to lift the benchmark lending rate was a unanimous 8-0.
5 Solid Choices
Given the aforesaid positives, investing in sound stocks from such winning sectors seems prudent. These stocks are expected to report a significant uptick in Q1 earnings. They have a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
These stocks also flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Pioneer Natural Resources Company PXD operates as an independent oil and gas exploration and production company in the United States. The company is expected to report earnings results for the quarter ending March 2018 on May 2. Pioneer Natural Resources has an Earnings ESP of +1.14%. The company, which is part of the Zacks Oil and Gas – Exploration and Production – United States industry, has a Zacks Rank #1 and a VGM Score of B.
Archrock, Inc. AROC engages in the natural gas contract operations services business in the United States. The company is expected to report earnings results for the quarter ending March 2018 on May 3. Archrock has an Earnings ESP of +100%. The company, which is part of the Zacks Oil and Gas – Field Services industry, has a Zacks Rank #2 and a VGM Score of B.
Stepan Company SCL produces and sells specialty and intermediate chemicals to other manufacturers for use in various end products worldwide. The company is expected to report earnings results for the quarter ending March 2018 on Apr 24. Stepan Company has an Earnings ESP of +0.34%. The company, which is part of the Zacks Chemical – Diversified industry, has a Zacks Rank #2 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
H&E Equipment Services, Inc. HEES operates as an integrated equipment services company. The company is expected to report earnings results for the quarter ending March 2018 on Apr 26. H&E Equipment Services has an Earnings ESP of +33.33%. The company, which is part of the Zacks Manufacturing – Construction and Mining industry, has a Zacks Rank #2 and a VGM Score of A.
CNO Financial Group, Inc. CNO develops, markets, and administers health insurance, annuity, individual life insurance, and other insurance products for senior and middle-income markets in the United States. The company is expected to report earnings results for the quarter ending March 2018 on Apr 25. CNO Financial Group has an Earnings ESP of +4.55%. The company, which is part of the Zacks Insurance – Multi line industry, has a Zacks Rank #2 and a VGM Score of B.
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