By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- Energy and utilities stocks will
face a crucial test this week with several big earnings reports due
from sector heavyweights ExxonMobil Corp, Chevron Corp., and
Dominion Resources Inc.
Both utilities and energy stocks have been the best performers
for the quarter and year, even as the broader market has struggled
to find direction. The Dow Jones Industrial Average (DJI) declined
0.3% last week and is down 1.3% for the year. The Nasdaq Composite
Index (RIXF) fell 0.5% last week for a 2.4% deficit on the year.
Only the S&P 500 Index (SPX) is showing a gain on the year, up
0.8%, as it finished down less than 0.1% last week.
The utilities and energy sectors added to their gains for the
quarter and year last week. Utilities stocks are up 4% for the
quarter and 13% for the year, while energy stocks are up 4.4% for
the quarter and 4.6% for the year.
With quarterly reports out from Dow energy components like
ExxonMobil (XOM) on Thursday and Chevron (CVX) on Friday, investors
will be combing outlooks for evidence of the economic recovery,
said Robert Pavlik, chief market strategist at Banyan Partners.
"If the economy is improving you want to hear that demand is
improving," said Pavlik. "You want to hear positive comments."
Outlooks this earnings season, while still more negative than
average, are slightly less negative than they were halfway through
the previous season. Of the 51 S&P 500 companies that have
offered a profit outlook, 36, or 70%, have guided below the Wall
Street estimate at the time, according to John Butters, senior
earnings analyst for FactSet. While that's above the 5-year average
of 65%, it's below the 81% at the end of January.
Nearly half the companies in the S&P 500 have already
reported this earnings season with more than 130 companies
reporting in this week. By market weight, 58% of the energy sector
and 66% of the utilities sector will be reporting this week,
according to Goldman Sachs data.
Energy sector under pressure to meet low expectations
The energy sector faces a tough road. Already the sector with
the worst expected earnings decline this season, results have yet
to even clear those low marks. The energy sector was expected to
post an earnings decline of 7.6%. Results so far are showing a 9%
decline.
Given the weak earnings outlook, some investors are saying the
recent spike in energy stocks and exchange-traded funds like the
Energy Select Sector SPDR (XLE) is a classic late-cycle play in an
aging bull market. Others see it as a smart bet because of
innovation in the industry and higher crude-oil and natural-gas
prices. Those higher prices, however, slipped this past week with
oil seeing its worst weekly drop since mid-March and natural-gas
prices down 2% on the week.
Banyan's Pavlik said he's more interested in how oil-field
services companies are doing this season seeing that firms like
Baker Hughes Inc. (BHI) topped earnings expectations recently.
"Now that most of the large shale plays have been found, there's
been a drop off in production," Pavlik said. "So, [exploration and
production companies are] going to be searching for more types of
these wells."
Energy-services companies reporting this week include National
Oilwell Varco Inc. (NOV) and Ensco PLC (ESV). Other energy earnings
this week include ConocoPhillips (COP), Valero Energy Corp. (VLO),
Hess Corp. (HES), Phillips 66 (PSX), and Marathon Petroleum Corp.
(MRO)
High-flying utilities have less pressure to impress
Similarly, inflows into utilities stocks and ETFs like the
Utilities Select Sector SPDR (XLU) are also being eyed with
suspicion, since the high-dividend stocks act as bond proxies that
will likely falter the closer the Federal Reserve gets to hiking
its federal funds rate.
Utilities, however, appear to be less under the gun as earnings
so far have outperformed expectations with a gain of 15.2%,
compared with an expected 7.6% at the end of the quarter. Still,
that was only with 13% of the sector's weight reporting. Remember,
66% of the sector's weight reports this week.
Big names in utilities reporting include Dominion (D) , Southern
Co.(SO) , NextEra Energy Inc.(NEE) , Exelon Corp.(EXC) , Edison
International (EIX) , PPL Corp.(PPL), PG&E Corp.(PCG), Public
Service Enterprise Group Inc.(PEG), and Sempra Energy (SRE).
Also earnings from Merck, Twitter, Time Warner
Other earnings reports due this week include Dow component Merck
& Co. (MRK) on Tuesday. Health-care earnings are also due from
Bristol-Myers Squibb Co.(BMY), Express Scripts Holding Co.(ESRX),
Boston Scientific Corp.(BSX), WellPoint Inc.(WLP) , and Cardinal
Health Inc. (CAH) .
Other notable earnings reports this week include those from
Twitter Inc. (TWTR) , LinkedIn Corp. (LNKD), eBay Inc.(EBAY) , Time
Warner Inc.(TWX) , MasterCard Inc.(MA) , Viacom (VIA) , Expedia
Inc. (EXPE) , Kraft Foods Group Inc.(KRFT) , and CVS Caremark Corp.
(CVS).
With nearly half the S&P 500 having already reported, the
earnings growth rate has finally broken back into positive
territory with a gain of 0.2%, following a reading of a 2% decline
as little as a week ago. At the beginning of the year,
first-quarter earnings were forecast to grow by more than 4%,
though those estimates fell over the quarter as winter weather hurt
businesses.
On average, companies have been beating Wall Street earnings
expectations in-line with the four-year average of 73%, and
earnings surprises have been fairly consistently rewarded and
punished by investors, according to FactSet's Butters.
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