Profits Preview

by: , Portfolio Strategist, MainStay Investments

We’ve got the Federal Reserve (Fed) on hold until December, the Bank of Japan targeting a 0% rate on its 10-year bonds, and the first presidential debate behind us, so now it’s time to preview the upcoming third quarter earnings season.

As a reminder, the S&P 500 Index has experienced a prolonged earnings slump tied to a prior seven quarter decline in energy prices, a stronger currency, and a decline in manufacturing activity early this year.1 Much of this was connected to China’s economy slowing as we entered 2016. Since then, things have firmed a bit. A muddle-though economy with low inflation in both the U.S. and globally is a reasonable base case scenario.

The following chart shows what the analyst community is expecting in terms of S&P 500 profits.

Expectations of S&P 500 Profits

chart_9_26-16_blog

Source: Bloomberg, as of 9/23/16.

Overall, year-over-year profits growth is expected to be pretty flat in the third quarter before turning positive in the 4th. Profit growth is expected to be 13% higher next year compared to this year, according to Bloomberg. That might be a little high but we won’t know until next year. Let’s turn to the sectors.

The fastest year-over-year profit growth in the third quarter is expected to come from the utilities, health care, consumer discretionary, and materials sectors, while the slowest should be found in energy and industrials. It will take a couple weeks to see how it all comes together.

Alcoa is expected to report on October 10 to mark the unofficial start of the third quarter earnings season. By the time Exxon reports on October 28, we should have broad-based sector representation and a good sense of the overall profits season as we head into the New Year.

1. Source: Bloomberg, as of 9/23/16.

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

The S&P 500 Index is defined as an index of 500 stocks chosen for market size, liquidity and industry grouping and is designed to be a leading indicator of U.S. equities and reflect the risk/return characteristics of a large cap universe.

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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for the Strategic Asset Allocation & Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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