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Greece Makes A Deal: Now Let’s Focus On U.S. Earnings

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July 14, 2015

Will Greek headlines finally fade into the rearview mirror and let U.S. investors get back to the business of earnings? Maybe yes. This week could offer U.S. investors a clean slate and an opportunity to focus back on domestic issues. In recent weeks, markets have been pummeled by global headline news revolving around a potential Greek exit from the Eurozone and a plunging Chinese stock market.

Global stock markets rebound

A last minute deal announced Monday that Eurozone leaders would give Greece fresh bailout loans triggered a rally in European stocks. In Asia, Beijing's efforts to stabilize the recent massive stock sell-off in China are starting to take hold. The Shanghai Composite Index ended up 2.4% on Monday and gained 13.2% from Wednesday's close.

"Completion of the Greek deal takes away one of the major areas of instability in the market. In some ways it has just been a distraction and has kept the U.S. from focusing on things that need to be done to move our economy forward," says JJ Kinahan, chief strategist at TD Ameritrade.

News of a Greek deal and stability in the Chinese stock market could also mean a green light for the U.S. Federal Reserve this year on at least one or possibly two interest rate hikes. Traders will be monitoring Fed Chair Yellen’s semi-annual monetary policy testimony before Congress this week for additional clues on the timing of a first rate hike.

"The Fed has been very clear that they will raise interest rates once this year and possibly twice," says Kinahan. "We are starting to see a bit of stability in China, although that situation remains precarious. But, if both the Greece and China situations stabilize it could raise the odds for a second rate hike this year," he added.

Back to business: earnings week

Over 40 S&P 500 companies are expected to report earnings this week and with global hot spots cooling down, many investors may return their focus to the U.S. outlook. Investors are bracing for weakness in the slew of upcoming second quarter's earnings releases. "The S&P 500 is expected to show an earnings decline of 4.4% in the second quarter," said Sam Stovall, chief equity strategist at S&P Capital IQ.

The sharp rise in the U.S. dollar is the main culprit along with heavy declines in the price of crude oil. The U.S. dollar index, on a month-end basis, climbed 20% from the second quarter 2014 to the second quarter 2015, Stovall says. "It looks as if we could have some headwinds from the currency translation. If company earnings are made overseas, unhedged dollar exposure will reduce earnings by 20%," Stovall explains. Big multi-national companies frequently do hedge dollar exposure, but "chances are they did not hedge 100%," he notes.  

"With the U.S. dollar continuing to strengthen it will be important to see what CEOs will say about the impact of the rising currency on sales. Listen in on earnings calls and see if CEOs are putting the Greece situation behind them? Do they expect improvement in the Eurozone?" says Kinahan.

Winners and losers

Energy companies were hit hard by the 42% drop in the price of crude oil over the past year. S&P Capital IQ forecasts a 60.9% decline in year-over-year operating earnings for energy sector companies in the S&P 500. There are bright spots in the earnings outlook. The consumer discretionary sector, which includes autos, home builders, and retailers, is projected to show a 6.2% earnings increase, while telecommunications services should show a 6.0% rise. The health care sector is also expected to show a 5.7% gain.

Improving earnings outlook ahead

The second quarter earnings slump could just be a temporary blip in an overall improving picture. Stovall expects to see a "V" shaped recovery for subsequent quarters ahead. "We are expecting each quarter to show successive earnings improvements," he said. In the third quarter, S&P Capital IQ forecasts a 1.4% decline in S&P 500 earnings, followed by a 2.8% gain in the fourth quarter. The first quarter 2016 is projected to show a 7.5% gain in S&P 500 earnings.

The message for investors?

Take second quarter's earnings news in stride. "The anticipated earnings shortfall has been known for some time. If equity markets have remained resilient despite that—something else will be needed to derail the bull market," says Stovall. "Stay the course and don't let your emotions become your portfolio's worst enemy."

If you are a TD Ameritrade client, you can use  the TD Ameritrade Earnings Announcement calendar to keep tabs on companies that you have positions in. 

greece deal earnings focus

FIGURE 1:

Log in to your account at tdameritrade.com and click on the Research & Ideas tab. Choose Calendar under Markets. Click on Earning Announcements under Today’s Events. For illustrative purposes only.