Your Ultimate Income Earnings Preview: Where to Expect High Performance
With the big banks kicking off earnings reporting season this Friday, we can look forward to another round of dramatic price swings as earnings results dominate headlines and boost volatility in the record-setting options market over the next few weeks.
That's good news for Ultimate Income members – as the higher volatility raises options premiums so we can earn more instant income on each of our trades.
But be aware: this time around, earnings season could be a little different.
Last time around, Wall Street analysts set a low bar for earnings-per-share (EPS) growth. Going into the last reporting period, analysts expected roughly 4.5% growth from the S&P 500 overall. But after a series of high-profile surprises, 76.3% of S&P 500 companies beat those low-balled estimates – and Q4 profits surged 10.1%.
That was great for stock prices… but this earnings season, strong economic data puts the timing of Federal Reserve rate cuts into serious doubt. Plus, higher stock valuations are sticking despite persistent inflation, meaning it's going to take a wave of very strong results to support the market at current levels.
Can The S&P 500 Beat High Expectations?
The situation isn't helped by earnings forecasts for the rest of year. Currently, analysts expect the S&P 500 to deliver more than 11% in EPS growth over the next few quarters, which is much higher than usual:
With the S&P currently trading at roughly 27 times its reported earnings, these high expectations could bring prices down if we aren't met with another round of positive EPS surprises this season.
Thankfully, Wall Street currently expects only 5.1% in EPS growth for the first quarter of 2024 – which could be teeing up the S&P 500 to clear the bar and keep this rally going.
Where to Expect High Performance This Season
Going into this high-stakes earnings season, we've seen a quiet but gradual shift in the market. As I've mentioned previously, investors are shifting away from the high-profile tech names in the "Magnificent 7," moving their attention into more cyclical sectors. And many of those flew above expectations in the last earnings season., investors are shifting away from the high-profile tech names in the "Magnificent 7," moving their attention into more cyclical sectors. And many of those flew above expectations in the last earnings season.
As you can see in the chart below, the consumer discretionary, energy, industrial, and health care sectors delivered the most surprising performances last earnings season. In fact, they ended up outperforming technology sector by a solid margin.
Recently, we've seen these same sectors lead the way in terms of market performance – which could be an early sign of confidence. So, I wouldn't be surprised to see similar moves in those spaces again during the next few weeks of earnings.
Looking at the holdings in our own model portfolio, we can already see the signals.
In the energy sector, Ultimate Income members have Halliburton (HAL) and Occidental Petroleum (OXY) – both of which performed well in the last quarter of 2023, with upside EPS surprises of 8.07% and 7.45%, respectively.
Despite their strong showing – and the outperformance of their sector overall – analysts have set the bar surprisingly low for both stocks this quarter.
Currently, Occidental is expected to announce an EPS of only $0.59 when they report on May 8 – about 10 cents lower than last quarter's expectations, and far lower than the EPS of $0.74 marked in the fourth quarter of 2023.
Likewise, Halliburton is expected to report an EPS of $0.75 – again, that's 10 cents lower than the $0.86 EPS reported last quarter, and five cents lower than the $0.80 that had been expected of the company at the time. And we'll hear from HAL soon: the company reports earnings on April 23.
While the covered calls we currently have open on these stocks are too close to call, I'll be keeping a close eye on both – with an eye toward rolling these options when the timing is right. Keep an eye out for more trades – and more earnings news – as we approach this high-volatility season.
Good investing,
Mike Burnick Senior Analyst, Ultimate Income
P.S. Did you enjoy this pre-earnings discussion, and are there other topics you'd like to learn more about? Please be sure to let me know – and pass along any other questions or comments. Please reach out to me at emailmikeburnick@tradesmith.com and include "Ultimate Income" in the subject line.
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