Earnings Outlook

Nearly every stock in the S&P 500 has reported earnings for the second quarter, and the earnings growth has been fairly impressive. It looks like the final earnings growth number will be about 12.0%. For comparison, at the start of the second quarter, Wall Street was expecting just 8.8% earnings growth. The second quarter marks the eight straight quarter of double-digit earnings growth.

Nearly 70% of the companies in the S&P that have reported have beaten expectations. For a typical quarter, 59% of companies top expectations. Only 16% of companies have missed estimates compared with 20% for a typical quarter.

Earnings growth has been heavily tilted to the energy sector which saw its profits grow by 42%. If you take out energy, the rest of the S&P 500 grew its earnings by 8.5%. The earnings growth rate has been slowing dropping for the past quarters, but it should finally started expanding again. Earnings growth should pick up to about 17% for the third quarter. However, this earnings pick-up might be short-lived. For the fourth quarter, profit growth is expected to pull back to 14%. And for next year, earnings are expected to grow at 10.8%. I think Wall Street and the Federal Reserve are still trying to judge the impact of Hurricane Katrina.

The Consumer Discretionary group, which has seen its profits dip lately, is expected to lead the market next year. Here are the 2006 earnings growth expectations for the 10 major market sectors, note that Energy is last.
Consumer Discretionary 17.61%
Information Technology 16.85%
Health Care 14.89%
Industrials 14.41%
Utilities 10.60%
Materials 10.33%
Consumer Staples 8.38%
Financials 6.11%
Telecommunication Services 4.60%
Energy -0.50%

Posted by on September 7th, 2005 at 2:51 pm


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