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What To Own And What To Avoid This Earnings Season

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What To Own And What To Avoid This Earnings Season

Bank of America Merrill Lynch Equity & Quant Strategist Savita Subramanian looked at what to expect going into next week’s earnings season kickoff. Savita believes soft data points to a modest earnings beat in the second quarter.

Subramanian noted that analysts have not cut estimates as much as usual, and industrials is the only sector where expectations have been raised.

“We forecast $32.00 for 2Q EPS, implying +8% YoY growth, a 2% beat vs. consensus, half as much as the average post-crisis average beat magnitude. Continued weakness in the US dollar – down 5% in the 2Q – is a positive, as are corporate commentary, management guidance and revision trends,” Subramanian said.

‘Growth Slowdown Off Of Easy Comp Q1 Is Inevitable’

Subramanian noted decelerating trends are likely in Q2. However, he still expects healthy numbers as economic data remains strong, Europe expects another strong earnings season, and Bank of America Merrill Lynch’s Global Wave has risen over the past 13 months (see Subramanian's track record here).

Early Earnings Reporters Are Starting Off Strong

So far, a record 23 companies with May quarter-end reports beat on earnings. This “can typically give an early read on results — the proportion of early reporter beats has been highlight correlated with full-quarter beats since we began tracking the data in 2012, particularly for sales beats. This suggests top and bottom-line beats could be widespread this quarter, and suggests upside risk to our forecast for a 2% beat,” Subramanian noted.

Watch Out For Weakness In Q2 Guidance

After a tremendous amount of companies raised guidance in Q1, Subramanian is not sure whether this trend will continue.

”We suspect corporates could temper their tone in 2Q given growing uncertainty around growth and tax reform/stimulus. While we expect a beat vs. consensus in 2Q, analysts’ forecasts continue to look overly optimistic for the 2H, particularly in 4Q,” he wrote.

What Should You Own?

  • Most Attractive: Industrials, health care and technology.
  • Least Attractive: Telecom, utilities and energy.

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