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Can Fed Put Counter Potential Negative Q2 Earnings? 5 Picks

Nalak Das

Wall Street rally is continuing for nearly one and half months after a market rout in May. While this rout was primarily attributed to an abrupt breakdown of U.S.-China trade talks, the latest rally is predominantly influenced by the Fed’s strong signal of an interest rate cut this month. The rally continues despite lingering trade conflict.

While Fed’s willingness to cut rate -- popularly known as Fed put -- is likely to boost investor sentiment, Wall Street is also facing an immediate concern of a negative earnings session for the second quarter of 2019. Can Fed put be strong enough to overcome a possible decline in second-quarter earnings, thereby maintaining Wall Street’s momentum seen so far in 2019?

Bleak Expectations From Second-Quarter Earnings

At present, the market is anticipating a negative earnings session for the second quarter of 2019. As of Jul 10, total Q2 earnings for the S&P 500 Index are expected to be down 3.3% from the year-earlier period on 4.0% higher revenues. This would follow the 0.2% earnings decline on 4.5% higher revenues in Q1.

If the current consensus estimate for the second quarter proves itself true, then it will be two consecutive quarters of earnings decline for the S&P 500. Technology, Aerospace, Basic Materials, Construction and Conglomerates sectors are likely to witness double-digit decline in second-quarter earnings.  (Read More: Previewing the Q2 Earnings Season)

Wall Street Hit Record High on Fed’s Rate Cut Signal

On Jul 10, in a testimony to the House Financial Services Committee, Fed chair Jerome Powell reiterated the central bank’s commitment to act as appropriate to sustain U.S. economic expansion, giving a clear message of a rate cut possibility in the upcoming FOMC meeting scheduled on Jul 30-31.

At present, 100% respondents of CME FedWatch are expecting a 25 basis-point reduction in interest rate in July. Consequently, the Dow crossed the 27,000 level for the first time on Jul 11. The S&P 500 touched the 3,000 mark for the first time and Nasdaq Composite also recorded a fresh all-time high.

Although Powell said in his congressional testimony that U.S. business investment, housing investment and manufacturing output have weakened considerably, it was primarily due to crosscurrents of trade tensions and weak global growth. The Fed chair noted that the U.S. jobs market remained robust and consumer spending may have rebounded in the second quarter of 2019.

Can Fed Put Boost Investors’ Confidence?

According to Sam Stovall, chief investment strategist at CFRA, “the S&P 500, since World War II, has risen 10.3% on average in the six months after the Fed starts cutting rates, and then 14% by the end of the first year."

However, the U.S.-China trade conflict is very much alive and in second-quarter earnings reports, the market will see the magnitude of decline in corporate profits due to tariff war and slower global growth.

On the other hand, Fed’s rate cut will not only make cheaper funds available to businesses and stock market investors, but also U.S. dollar less expensive in the international market thereby raising the competitiveness of the country’s exports. Moreover, the yield curve of U.S. government bonds has steadied, signifying a shift of funds to risky equities markets.

Selection Criteria of Our Picks

First, we selected large-cap stocks from the S&P 500 Index as these companies are doing business for a long time and their stock prices are generally stable. Second, these stocks are regular dividend payers. So, during severe market downturns, they can prove to be a regular income stream. Third, these stocks popped up in the past three months despite market volatility.

Moreover, all these stocks are expected release earnings reports this month and have a positive Earnings ESP. Finally, each of our picks carry a favorable Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Northrop Grumman Corp. NOC is a security company, provides products in the areas of autonomous systems, cyber, space, strikes, and logistics and modernization in the United States, the Asia Pacific and internationally. It operates through four segments: Aerospace Systems, Innovation Systems, Mission Systems, and Technology Services.

Northrop Grumman has an Earnings ESP of +1.08%% for the current quarter. The Zacks Consensus Estimate for the current quarter and year improved 0.2% and 0.5%, respectively, over the last 30 days. The company delivered positive earnings surprise in the last four quarters with an average beat of 18.50%.

The stock has surged 16% in the past three months and offers a dividend yield of 1.63%. Northrop Grumman is expected to release earnings results on Jul 24, before the opening bell.



Thermo Fisher Scientific Inc. TMO provides analytical and other instruments, laboratory equipment, software, consumables, reagents, instrument systems, chemicals, supplies, and services worldwide.

Thermo Fisher has an Earnings ESP of +0.42%% for the current quarter. The Zacks Consensus Estimate for the current quarter and year improved 0.3% and 0.1%, respectively, over the last 30 days. The company pulled of a positive earnings surprise in the last four quarters with an average beat of 2.94%.

The stock has climbed 6.5% in the past three months and offers a dividend yield of 0.30%. Thermo Fisher is expected to release earnings results on Jul 24, before the opening bell.



Newmont Goldcorp Corp. NEM operates in the mining industry. It primarily acquires, develops, explores and produces gold, copper, and silver. Its operations and assets are located in the United States, Australia, Peru, Ghana and Suriname.

Newmont Goldcorp has an Earnings ESP of +1.45%% for the current quarter. The Zacks Consensus Estimate for the current quarter and year increased 3.7% and 11.4%, respectively, over the last 30 days. The company delivered positive earnings surprise in the last four quarters with an average beat of 39.79%.

The stock has climbed 8.6% in the past three months and offers a dividend yield of 1.43%. Newmont Goldcorp is expected to release earnings results on Jul 25, before the opening bell.



Starbucks Corp. SBUX operates as a roaster, marketer and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development.

Starbucks has an Earnings ESP of +0.42%% for the current quarter. The company has expected earnings growth of 17.4% and 14.9% for the current quarter and year, respectively.  The company pulled off a positive earnings surprise in the last four quarters with an average beat of 7.73%.

The stock has surged 17% in the past three months and offers a dividend yield of 1.63%. Starbucks is expected to release earnings results on Jul 25, after the closing bell.



CME Group Inc. CME is the world's leading and most-diverse derivatives marketplace. CME Group exchanges offer the widest range of global benchmark products across all major asset classes.

CME Group has an Earnings ESP of +2.13%% for the current quarter. The Zacks Consensus Estimate for the current quarter and year improved 4.2% and 1.4%, respectively, over the last 30 days. The company generated positive earnings surprise in the last four quarters with an average beat of 1.42%.

The stock has surged 19.1% in the past three months and offers a dividend yield of 1.48%. CME Group is expected to release earnings results on Jul 31, before the opening bell.


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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
 
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