Why Earnings Have Failed to Inspire Investors
No Solace in Small Caps
In an effort to mitigate the impact of a stronger dollar, many investors have been favoring small-cap stocks. However, this strategy hasn’t provided much benefit year-to-date. Russ explains why.
In the US, second-quarter earnings season has generally been better than expected. However, it has failed to inspire investors. While low rates and sluggish wage growth have allowed profit margins to remain at record levels, large US companies continue to struggle with the competitive headwind caused by a stronger dollar, which has hurt revenues and estimates of third quarter earnings.
Market Realist – Earnings have failed to inspire investors as the stronger dollar has eaten into company earnings.
The stronger dollar (UUP) has been a major headwind for large caps (OEF) in the last few quarters. A stronger dollar makes US exports less competitive as foreigners have to pay more in their currency in exchange for a dollar.
Also, companies that have exposures abroad lose out when converting foreign earnings into dollars. Along with the stronger dollar, lower crude oil (USO) prices have also pulled earnings down.
The second graph shows the YoY (year-over-year) earnings growth for the S&P 500 (SPY) (IVV), along with that of the ten sectors. The healthcare sector (IYH) has shown the best earnings growth of 15.4% YoY. Meanwhile, energy sector earnings (XLE) have plummeted by a whopping 56.4% YoY. The only other sector that has seen negative YoY earnings growth is the industrials sector (DIA), which saw its earnings dip by 4.8%.
However, the deep negative earnings growth in the energy sector has led to a negative earnings growth of 1.0% in the S&P 500, which could mark the first yearly earnings decline for the S&P 500 since 3Q12.
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