Alcoa, Fastenal, CSX, J.P. Morgan And Apple Are Part Of Zacks Earnings Preview

For Immediate Release

Chicago, IL – July 11, 2016 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Alcoa (NYSE:AA) (AA), Fastenal (FAST), CSX Corp (NASDAQ:CSX). (CSX), J.P. Morgan ( JPM) and Apple (NASDAQ:AAPL) (AAPL).

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Previewing Q2 Earnings Season

Alcoa (AA) may no longer be as relevant to the U.S. economy and the stock market, but the company’s name gets plenty of sunshine from the widely-held belief that its earnings report kick-starts each quarterly reporting cycle. Many in the market even see the company’s earnings report as a leading indicator of what to expect from the rest of corporate America. But that is most likely overstating the company’s status, notwithstanding aluminum’s growing role in the automotive, aircraft manufacturing and construction end markets.

The bottom line is that the relevance of Alcoa’s results and outlook is fairly limited; it doesn’t tell us much beyond what may be useful for the broader industrial metals space. Results the day after Alcoa’s report from industrial nuts-and-bolts supplier Fastenal (FAST) and the following day (July 13th) from railroad operator CSX Corp. (CSX) have a lot more relevance to the economically sensitive parts of the U.S. economy.

This week will bring earnings results from 30 companies, including 13 S&P 500 members that include most of the money center banks. These wouldn’t be the first Q2 reports as companies with fiscal quarters ending in May have already been coming out with results and those reports get counted as part of the Q2 tally. In total, 23 S&P 500 members with fiscal quarters ending in May have reported Q2 results already.

Expectations for the Quarter

Total earnings are expected to be down -6.2% on -0.6% lower revenues, with growth in negative territory for 9 of the 16 Zacks sectors. This will be the 5th quarter in a row of negative earnings growth for the S&P 500 index.

As has been the pattern in other recent periods, the Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -76.8% on -27% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be down -3.0%.

As negative as this revisions trend looks, it is nevertheless an improvement over what we had seen in the comparable period(s) in other recent quarters. The improved commodity-price backdrop and the reduced dollar drag are some of the explanations for this development. It will be interesting to see if this trend of decelerated negative revisions will continue this earnings season. But we will have to wait a few more weeks to get a better read on this development after companies start reporting June quarter results and guide towards Q3 estimates. Current estimates for Q3 are showing flat growth from the year-earlier level.

Standout Sectors

While Energy stands out for its very tough comparisons, there is not much positive growth coming from the other major sectors either. The Finance and Technology sectors, the two biggest earnings contributors in the S&P 500 index, are also expected to see earnings decline in Q2 from the year-earlier levels.

For the Finance sector, total Q2 earnings are expected to be down -6.6% on -0.5% lower revenues, which will follow -6.9% decline in the sector’s earnings in the preceding quarter. It has been a tough period for the sector, with benchmark treasury yields going down the summary 2012 record lows on the back of the Brexit surprise and Fed expectations. This low interest rate environment is a big restraint on the group’s earnings power through continued pressures on net interest margins.

The recent completion of the Fed stress tests has improved the outlook for share buybacks and dividend increases across the major banks space, but the group’s earnings outlook continues to remain under pressure, as recent estimate cuts to all the major banks show. On the docket for reports this week include J.P. Morgan (JPM) on Thursday (7/14).

The Technology sector, total earnings are expected to be down -6.4% on +2.7% higher revenues, which would follow the sector’s -4.5% earnings decline on +0.4% higher revenues in Q1. The big culprit for the Tech sector’s weak showing this quarter (as well as last one) is Apple ( AAPL), whose June quarter earnings are expected to be down -28.4% on -15.2% lower revenues from the same period last year. Excluding Apple, the Tech sector’s Q2 earnings would be down only -0.9% (Apple alone brings in roughly a fifth of the Tech sector’s total earnings).

On the positive side, Q2 earnings are expected be up at Autos (up +8.2%), Construction (+8.9%), Conglomerates (+11.8%), and Utilities (+21%). The Utilities and Conglomerate sectors’ strong growth numbers are solely due to easy comparisons.

About the Zacks Rank

Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.

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