These 4 Sectors Will Disappoint Investors This Earnings Season

After Alcoa’s report yesterday Q2 earnings season is officially underway. The first quarter was largely filled with disappointments, despite a majority of companies in the S&P 500 topping expectations. Growth came in negative for yet another quarter, falling by over 2% and further entrenching us in the earning recession. Unfortunately, second quarter earnings are expected to be more of the same with early indications calling for negative earnings and revenue growth. The worst of performers are expected to come from sectors such as Airlines, Energy, Technology or Financials. According to Estimize data these sectors have been on the move, as witnessed by negative year over year growth estimates, heavy downward revisions and a history of missing expectations. The combination of these factors have typically led to a significant underperformance.

Photo Credit: Julio Gormaz

Airlines

It’s not surprising to see airlines on a list of worst performers for the second quarter. Many of the traditional names like United, Delta and American Airlines have struggled to gain traction in this volatile environment. The stocks have been hit hardest from waning travel demand and currency headwinds. Between terror attacks and health scares, people are more reluctant to travel, especially overseas. The strong U.S. dollar has also hurt topline growth and with Brexit aftermath expected to loom for the next few years, the airlines should continue to underperform in key PRASM metrics. That said, discount airlines like Southwest and Spirit have remained resilient. The biggest difference is that these names are insulated from macroeconomic risk because they only offer domestic flights.

Energy

A lot has occurred in the energy market that has caused the U.S. oil giants to tumble. Low crude prices and the fallout in Doha have put pressure on Chevron and Exxon Mobil’s earnings. Both revenue and earnings have steadily declined over the past 2 years tracking the lower prices in oil. After hitting lows in February, oil had started to show some signs of life, eclipsing $50 per barrel. It won’t be long until rising oil prices boost earnings but don’t expect it to be as soon as this quarter. Assuming we don’t see more Brexit uncertainty and the US presidential election isn’t too tumultuous, then energy stocks might be on their way to reversing their misfortunes

Technology

Technology is a big part of everyone’s life but that hasn’t made it the best financial investment. A central theme in this sector has been decelerating growth and weak forward guidance. Strong earnings are simply not enough to push the needle, companies must be optimistic about the future as well. This has pushed popular names such as GoPro and Fitbit into the gutter as they suffer to jumpstart growth. Even big technology names have had their troubles. Google is coming off a weaker than expected quarter largely weighed down by its moonshot investments. If these companies continue can’t show signs that they are able to turn a profit or maintain strong revenue growth then Q2 will likely be more of the same. That said, not every company has fallen into this trap. Facebook has been one of the bright spots, continuing to post strong earnings and revenue growth as they continue to diversify outside of social media.

Banks

Not enough can be said about the banks. Since the 2008 financial crisis, a slew of regulations and litigations have held back Wall Street. The largest concerns of the last year have been the strong U.S. dollar, low interest rates, loan loss reserves from energy weakness and macroeconomic risks. The U.S. dollar only gained strength after Brexit crushed the Euro and Sterling. For JPMorgan this is a big problem as they have a big presence in Europe and especially London. Brexit volatility has also prolonged the Fed’s timeline on when they raise interest rates. It’s become a common theme amongst the banks that low interest rates have driven down net interest income quarter after quarter. Meanwhile investment banking and M&A activity continues to decline across the board.