The stock market is clearly struggling to stay afloat at this juncture, balancing the domestic economic renewal with the global risk coming from ISIS, Russia, the eurozone, and economic stalling in China.
A major catalyst or a reason to buy is what investors are searching for. The focus later next week will shift to the third-quarter earnings season, which is carefully monitored by investors.
The start of the third-quarter earnings season will officially begin with Alcoa Inc. (NYSE/AA) reporting next Wednesday. Alcoa is a decent barometer of the global economy. The company reported an excellent second-quarter earnings season, albeit the quarter was relatively average.
All eyes will focus not only on the ability of CEOs to control the expense side to drive revenues, but also on the actual revenue growth. The strong second-quarter gross domestic product (GDP) growth will help.
For the third-quarter earnings season, the earnings growth is estimated at 4.7%, well down from a much higher 8.9% as of June 30, according to a report from FactSet. (Source: “Earnings Insight: S&P 500,” FactSet web site, September 26, 2014.)
Worse yet, the report suggests that nine of the 10 sectors have reduced their earnings season expectations. This is not supportive of the recent record moves by the DOW and S&P 500.
Only the healthcare sector appears to have increased its expected earnings growth, bumping it up to 10.6% for the third-quarter earnings season, up from 9.4% as of June 30. Investors could consider buying an exchange-traded fund (ETF) to benefit, such as the SPDR S&P Health Care Equipment ETF (NYSEArca/XHE). On the small-cap stocks side, a healthcare ETF to look at may be the PowerShares S&P SmallCap Health Care ETF (NASDAQ/PSCH).
The two sectors that could struggle are the financial and energy sectors.
Without any leadership from the banks, the broader stock market could continue to see upside moves capped.
As for the energy sector, it is estimated to see earnings growth of a mere four percent for the third-quarter earnings season, down from 11.9% as of June 30. The decline has been driven by the fall in oil prices to just above $90.00 a barrel and threatening to break down towards $85.00. A downside slide to the low to mid-$80.00 level would open up a new buying opportunity for energy stocks or an oil ETF like the United States Oil ETF (NYSEArca/USO).
The telecom services area is estimated to see the biggest growth potential for the third-quarter earnings season. You could consider playing it via the SPDR S&P Telecom ETF (NYSEArca/XTL).
An area that is expected to be under some duress is discretionary spending, where the earnings are expected to fall versus 2013.
Early on, it looks like continued cautiousness ahead of earnings. About 85 S&P 500 companies have issued negative earnings-per-share (EPS) guidance compared to only 26 companies with positive guidance for the third-quarter earnings season. This doesn’t look promising for the stock market.
The research from FactSet suggests that revenues for S&P 500 companies will grow at a mere 3.7% in the third-quarter earnings season, up from the previous 3.5% estimate as of June 30.
My belief is that nothing major will happen with revenues and earnings until some time in 2015. The key will be to make sure you have some capital in the areas of expected growth.