Alcoa unofficially kicked off earnings season on July 8 with mixed results. Historically, Alcoa has been considered a barometer for corporate earnings. But a dramatically changing economic landscape and the weight of commodity pricing on this global manufacturer has changed that perspective. Thus, we can throw out the old adage: "As Alcoa goes, earnings season goes."
With Alcoa fading out, the financials sector could replace it as an earnings barometer partly because it provides a good perspective on the economic environment given its dependence on businesses and consumers for loan demand, as well as interest rate movements in achieving profitability.
Furthermore, reporting early is key to being an early-season predictor. The sector and specifically the banks will dominate the earnings calendar in the second week of reporting season as JPMorgan, Bank of America, Goldman Sachs., and Citigroup announce their results.
The information technology sector could also be considered an Alcoa replacement as it has the largest weighting in the index with regards to not only earnings but also in determining market direction. Therefore, we'll be keeping a close eye on the sector as earnings unfold.
All that being said, we think the greater focus should be on the consumer discretionary sector, even as this group brings in the rear of earnings season. The reason is more about future growth than second quarter results, which is already history.
The consumer discretionary sector is projected to have the best growth in 2015 driven by outsized double-digit growth in the second half. That coupled with the index's impressive price outperformance, means upbeat guidance will need to be provided for the third quarter (and second half). The consumer discretionary index has appreciated 5.6% year-to-date versus a 0.6% decline in the S&P 500. Their sentiment regarding the consumer and the outlook will determine where S&P 500 earnings and the market could go, making this group the best new barometer as we navigate second-quarter earnings, in our opinion.
Detail on specific companies within the consumer discretionary sector that we see as key growth drivers, as well as second half growth projections by S&P 500 sector are included in our report titled “Naming A New Bellwether Isn’t So Easy” published on July 9th.