Energy leads 2Q earnings, again
High-flying sector enjoys another quarter of stellar year-over-year growth, but that will change in the second half of the year.
NEW YORK (CNNMoney.com) -- Exxon Mobil and the other oil companies will probably keep enjoying shockingly large profits through the rest of the year, but the energy sector as a whole is about to lose its bragging rights.
After five quarters of leading the S&P 500 in quarterly earnings, the energy sector is about to take a back seat to both the materials and financial sectors, according to Thomson Financial.
With almost two-thirds of the S&P 500 having already reported second-quarter earnings, energy is pretty much locked in as the leader. The sector is on track to have grown earnings by 38 percent from a year ago, reflecting the ongoing run up in oil prices.
But in the second-half of 2006, comparisons start to get tougher, with the sector no longer primed to lead the other nine. In the third quarter, energy earnings growth is expected to slow to about 14 percent versus a year ago, while growth in the materials sector is expected to heat up. In the fourth quarter, energy earnings growth is expected to slow even more - to just 3 percent from the previous year.
However, that could change, particularly in the third quarter, if there's another sustained run-up in energy prices over the next few months, said John Butters, senior research analyst at Thomson Financial. Crude oil peaked at $78.40 a week ago and has been trading lower since then.
But for the time being, the materials sector is set to take the crown for the rest of 2006. The sector is currently expected to post earnings growth of 51 percent in the third quarter, and 44 percent in the fourth quarter.
Financials will take second place, thanks to a big recovery in the insurance sector after the impact of last year's hurricanes on profits. The financial sector is expected to grow earnings by 28 percent in the third quarter and 30 percent in the fourth quarter.
Overall earnings for the S&P 500 are expected to grow 14.9 percent in the third quarter and 14.8 percent in the fourth quarter. 2006 earnings is pegged to grow 14.5 percent compared with 2005.
Looking further ahead, earnings are forecast to slow a bit next year. The first quarter of 2007 should bring earnings growth of 10.4 percent, while the second-quarter growth is expected to be 8.5 percent. For all of 2007, S&P 500 earnings are expected to grow 10.4 percent.
Approximately 64 percent of the S&P 500, or about 322 companies, have already reported quarterly earnings, and the results have been very strong.
Earnings are currently on track to have grown 14.8 percent from a year ago, according to Thomson Financial. That's a blended figure, representing reported and expected earnings.
So far, 69 percent of reports have come in better than what analysts were expecting, Butters said. That's better than the long-term average for the S&P 500 - roughly 60 percent - and the average over the last eight quarters - around 67 percent.
Earnings have also been beating expectations by a larger-than-usual margin - around 5.4 percent. The long-term average is 3.2 percent and the average over the last 8 quarters was 3.6 percent.
Why are companies beating by more than usual? Partly, because they tend to lowball estimates.
"Companies are always conservative with their guidance," Butters said, noting that on average there are two negative pre-announcements for every one positive.
Yet, even within that context, the earnings that have beat estimates have been doing it by a greater margin than usual. General Motors (Charts), AT&T (Charts), Microsoft (Charts), Google (Charts), Merck (Charts) and Exxon Mobil (Charts) are among the big companies to recently post better-than-expected results.
Granted, there could be unforeseen disasters lurking in the remaining second-quarter earnings to be released over the next month or so. But barring that, the second quarter is on track to become the 12th consecutive quarter in which earnings growth has topped 10 percent - meaning that corporate profits will continue to provide a floor for the stock market in the months ahead.