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SECTOR WATCH: Second Quarter Earnings by Economic Sector
By Frederic Ruffy, Optionetics.com
7/22/2003 3:00:00 PM

http://www.optionetics.com/articles/article_full.asp?idNo=8752

This is a peak week for second quarter earnings reports with roughly one-third of the S&P 500 Index ($SPX) scheduled to announce their results. By Friday, roughly two-thirds of the S&P 500 will have reported earnings. At this point, analysts have a pretty good notion of what earnings will look like when the numbers are tallied. They expect that the companies of the S&P 500 will show 7% earnings growth in the second quarter when compared to the same period last year. However, while some sectors of the market have shown positive improvement relative to last year, not all of them have. In fact, some are reporting much worse-than-expected earnings results.

When the financial media or analysts discuss market earnings, it is usually in reference to the S&P 500. For example, if a market strategist tells clients that she expects earnings growth of 10% during the next two quarters, the analyst is probably referring to the average growth rate of the five hundred companies included in the S&P 500 Index. In addition, some financial research firms like Standard & Poor’s and Thomson Financial/First Call provide earnings information related to the S&P 500 on a regular basis. In sum, when talking about market earnings, it is generally in reference to the S&P 500, and not the Dow Jones Industrial Average ($INDU) or the Nasdaq ($COMPQ).

In order to make better sense of the total earnings picture, it is sometimes useful to compartmentalize the market into sectors and look at each group individually. The table below shows a common way of separating the S&P 500 into its various sectors. For instance, there are 83 financial companies that represent 21.14% of the total index. The S&P 500 Index also includes 23 energy companies, which account for 5.66% of the index’s total value. There are a total of ten different sectors.

Economic Sector
#of Companies
% of Index
2 Q 2003
Earnings Growth
2 Q 2003 Earnings Growth




(Estimate in April 2003)
(Estimate now)

Energy
23
5.66%
34%
37%

Materials
34
2.68%
3%
-9%

Industrials
60
10.41%
-9%
-13%

Consumer Cyclicals
86
11.11%
-3%
-4%

Consumer Staples
37
11.55%
5%
4%

Health Care
46
14.54%
11%
5%

Financials
83
21.14%
12%
19%

Technology
83
16.53%
23%
18%

Telecomm
12
3.58%
-7%
-3%

Utilities
36
2.80%
-17%
-23%

S&P 500 Total
500
100%
7%
6.9%


The table also lists the estimated earnings growth rates for the various sectors of the market and the S&P 500. The numbers reflect the consensus estimates collected by Thomson Financial/First Call. There are in fact two columns with estimated second quarter earnings growth rates. One column shows the estimated growth rates in April 2003 and the other shows the expected growth rates today. For example, analysts were expecting the S&P 500 to show 7% earnings growth in the second quarter when First Call polled them on April 1. Now, they expect 6.9% earnings growth rate. Therefore, their estimates earlier in the year were not too far from current levels.

Looking over the various sectors of the market reveals some interesting trends. Some sectors have been showing better-than-expected results and estimates for second quarter earnings growth have risen since April. For example, energy companies were expected to show earnings growth of 34% and now are estimated to post earnings growth of 37%. Financials, which account for the largest percentage of the S&P 500, are expected to show earnings growth of 19%, compared to previous estimates of only 12%. Meanwhile, telecomm stocks were expected to see earnings drop by 7%. Now analysts expect only a 3% decline.

While some sectors have surprised to the upside, analysts have been forced to revise their growth rates down in others. In April, technology stocks were expected to show 23% earnings growth in the second quarter. Now, it appears that the final number will be closer to 18%. Consumer cyclicals, basic materials, and industrials are all showing negative earnings growth. Results in those economically sensitive groups are therefore below the expectations set earlier this year. Utilities are by far the worse performers on an earnings growth basis. They are expected to show a 23% decline in second quarter profits.

Looking over the table reveals that the market is expected to show 7% earnings growth in the most recent quarter, but the results vary widely from one sector to another. Some are showing strong positive earnings growth, others are still seeing profits decline. For that reason, it makes sense to consider the sectors individually. By doing so, it allows us to compartmentalize the market and see where the earnings improvement is really occurring. From that point, we can select which groups are best suited for bullish trades and which seem better for plays to the downside.


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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