Two weeks from today, aluminum maker Alcoa (AA) will kick off the third-quarter earnings season—and analysts are already warning that it’s going to get rough out there. That’s because the earnings growth rate for companies in the S&P 500 are turning negative for the first time since the economic recovery began in 2009.
The takeaway here? This earnings season is going to be trickier than usual to navigate, and we’re already seeing the first signs that earnings will be dicey for some companies.
FedEx Corp. (FDX) reported a 1% drop in profits despite an increase in shipping rates. Even worse, the delivery giant has cut its 2013 earnings guidance to a range of $6.20 to $6.60 per share—Wall Street forecast earnings of $7.04 per share. Meanwhile, RBS Capital downgraded Intel Corp. (INTC) on ongoing concerns about the PC market which could have an impact on INTC’s earnings.
I fully expect that when earnings start to come out in force, this is going to take many investors by surprise. This will create an environment where bad reports are punished and good reports are rewarded with fresh buying pressure.
And that’s going to be a boon for those fundamentally-strong companies that can continue their rapid pace of growth.
For example, take my Emerging Growth Buy List. Earnings season doesn’t get started for our small- and mid-cap companies until late October, but the first companies to report in are set up for stunning announcements.
- Our "lights and lasers" aesthetic treatment company is expected to post 300% earnings growth.
- Our play on the foreclosure mess that continues to derail major U.S. banks is headed towards 80% earnings growth (vs. an 80% contraction in its competitors).
- And our heavy-hitter homebuilder is forecast to post 450% bottom-line growth, double the industry average.
And the good news is that this earnings dip is just that—a dip. After the third quarter, the S&P 500’s earnings are expected to grow in excess of 10% or more starting in the fourth quarter and in every quarter in 2013.
So don’t worry too much if you start to see a few otherwise-solid stocks dip into C-range territory in my Portfolio Grader tool as it reflects the slowdown in earnings through lower fundamental grades. This is a one-quarter bump in the road, and I recommend using any volatility to initiate positions in fundamentally strong companies.
Until next time,