3 Sectors Set To Report Explosive Growth As Q2 Earnings Season Ramps Up
Wall Street’s second quarter earnings season kicked off this week, with banking giants JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS) having reported yesterday; lenders Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C) all reporting on Wednesday, followed by Morgan Stanley (NYSE:MS) on Thursday.
FactSet data shows analysts anticipate Q2 S&P 500 earnings will surge by a whopping 64.0% when compared to the same period last year, mainly due to the fading impact of the COVID-19 health crisis on several industries and businesses.
If confirmed, Q2 2021 would mark the highest year-over-year (YoY) growth in earnings reported by the index since Q4 2009, when profit growth surged by 109.1%.
At the sector level, all 11 sectors are projected to report YoY earnings growth, led by the Energy, Industrials, Consumer Discretionary, Financials, and Materials sectors.
Revenue expectations are also promising, with sales growth predicted to rise 19.7% from the same period a year earlier. If confirmed, it will mark the highest YoY revenue growth reported by the index since FactSet began tracking this metric in 2008. The current record is 12.7%, which occurred in Q2 2011.
Ten out of 11 sectors are anticipated to report YoY revenue growth, led by the Energy, Materials, and Consumer Discretionary sectors. Utilities are expected to see earnings decline by 0.1%.
Below we break down three sectors whose financial results are projected to show explosive growth from the year-ago period amid current market conditions.
1. Energy: Higher Oil Prices Set To Boost Results
- Projected Q2 EPS Growth: N/A
- Projected Q2 Revenue Growth: +87.0% YoY
The Energy sector is forecast to report earnings of $13.5 billion for the second quarter, much better than a loss of $10.6 billion in the year-ago period, when the COVID-19 health crisis kicked into high gear and the economy shut down.
With higher crude prices benefitting the sector—the average price of WTI oil in Q2 2021 was $66.17 per barrel, 136% above the average price of $28.00 in Q2 2020—it is projected to record the highest YoY increase in revenue of all 11 sectors at 87.0%, according to FactSet.
At the company level, ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) are expected to be the largest contributors to the YoY surge in earnings for the sector. Combined, the two oil giants account for $13.0 billion of the projected $24.2 billion increase in earnings for the sector.
The two other notable names set to enjoy significant improvements in their Q2 financial results are Diamondback Energy (NASDAQ:FANG), which is projected to record a 1,300% YoY increase in EPS, and Marathon Petroleum (NYSE:MPC), which is anticipated to post EPS of $0.52, compared to a loss of $1.33 per share in the year-ago period.
The Energy Select Sector SPDR® Fund (NYSE:XLE)—which tracks a market-cap-weighted index of U.S. energy companies in the S&P 500—is up 38.2% year-to-date, compared to the S&P 500’s 16.3% gain over the same timeframe.
In addition to Exxon and Chevron, some of XLE’s largest holdings include ConocoPhillips (NYSE:COP), EOG Resources (NYSE:EOG), Schlumberger (NYSE:SLB), Marathon Petroleum, Pioneer Natural Resources (NYSE:PXD), Phillips 66 (NYSE:PSX), Kinder Morgan (NYSE:KMI), and Williams Companies (NYSE:WMB).
2. Consumer Discretionary: Hotels, Restaurants And Leisure To Drive Growth
- Projected Q2 EPS Growth: +207.7% YoY
- Projected Q2 Revenue Growth: +32.2% YoY
The Consumer Discretionary sector—which was amongst the hardest hit by the COVID-related shutdowns this time last year—is expected to report the second biggest YoY gain in earnings of all 11 sectors, with an impressive 207.7% surge in Q2 EPS, according to FactSet.
The group—which is perhaps the most sensitive to economic conditions and consumer spending—is also expected to report the third largest YoY revenue growth, with Q2 sales set to rise 32.2%.
Nine of the ten industries in the sector are projected to enjoy double-digit gains, led by Hotels, Restaurants, and Leisure stocks, which are expected to see their collective revenue jump 104% from a year ago.
At the company level, Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN) are two to watch. Caesars’ Q2 revenue forecast is $2.34 billion, an increase of nearly 1,700% compared to sales of $126.4 million last year, while Penn is expecting to report revenue of $1.46 billion, up about 400% from sales of $305.5 million in Q2 2020.
The Consumer Discretionary Select Sector SPDR® Fund (NYSE:XLY)—which tracks a market-cap-weighted index of consumer discretionary stocks drawn from the S&P 500—is up 12.9% since the start of the year, reaching a series of record highs in recent sessions.
XLY’s ten biggest holdings include Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA), Home Depot (NYSE:HD), Nike (NYSE:NKE), McDonald’s (NYSE:MCD), Lowe’s (NYSE:LOW), Starbucks (NASDAQ:SBUX), Target (NYSE:TGT), Booking Holdings (NASDAQ:BKNG), and TJX Companies (NYSE:TJX).
3. Materials: Metals & Mining Set To Drive Profit, Sales Growth
- Projected Q2 EPS Growth: +118.0% YoY
- Projected Q2 Revenue Growth: +32.6% YoY
The Materials sector is forecast to print the fourth largest YoY earnings jump of all 11 sectors, with second quarter EPS anticipated to surge 118% from the turbulent year-ago period, according to FactSet.
With stronger prices of metals—such as copper, and gold—helping the sector, it is also expected to report the second biggest YoY increase in revenue, with sales expected to grow almost 33%.
Not surprisingly, all four industries in this sector are predicted to report explosive Q2 EPS and revenue growth, with the Metals & Mining group set to see profit and sales spike 667% and 75% respectively from the year-ago period.
The Materials Select Sector SPDR® Fund (NYSE:XLB)—which tracks a market-cap-weighted index of U.S. basic materials companies in the S&P 500—is up roughly 14% in 2021.
XLB’s ten largest stock holdings include Linde (NYSE:LIN), Sherwin-Williams (NYSE:SHW), Air Products & Chemicals (NYSE:APD), Freeport-McMoRan (NYSE:FCX), Ecolab (NYSE:ECL), Newmont Mining (NYSE:NEM), DuPont de Nemours (NYSE:DD), Dow (NYSE:DOW), PPG Industries (NYSE:PPG), and International Flavors & Fragrances (NYSE:IFF).
Two companies from the group stand out for their potential to record impressive results. The first is Dow, which is expected to report earnings per share of $2.30, compared to a loss of $0.26 per share in the year-ago period. The second is Nucor (NYSE:NUE), which is projected to report EPS of $4.74, improving 1,200% from EPS of $0.33 in the same period a year earlier.