In the weeks since Brexit, stocks have been hitting record highs while bond yields have touched record lows. All this comes just as the second quarter earnings season kicks off, adding pressure to companies.
Wells Fargo equity strategist Gina Martin Adams says the key for investors will be if companies can live up to high expectations for earnings to bounce back in the second half of 2016 and in 2017.
“We see this hockey stick pattern of growth expected by analysts starting in the third quarter, fourth quarter, and then into 2017,” she said. “And we have a lot of question marks as to whether companies can suggest this is real.”
Indeed, one of the most controversial numbers on Wall Street are earnings expectations for 2017.
Meanwhile, the topline will be closely scrutinized, according to Adams, because it reflects strong underlying earnings growth that stands apart from cost cuts. Adams expects 4-5% revenue growth year-over-year, excluding energy, a number she expects to accelerate.
Market leaders
Over the last year, defensively-oriented sectors have led the market.
“In order to really sustainably move beyond this sideways trend in the market, you need to see more participation,” Adams said.
Adams added that sees the telecom sector (XTL) as more attractive at these levels than utilities (XLU), which have run up 20% over the last year and are overvalued relative to historical levels.
In risk-on sectors, Adams is looking to industrials for opportunities over financials.
“I see the industrials as still somewhat undervalued,” she said. “Investors don’t like them too much. They’re still tied to the energy sector, there’s still some international exposure. But when you dig a little deeper in the industrials you can find some very pure domestically oriented names that don’t have that much energy exposure that might have gotten thrown out with the bathwater of the energy crisis of the last year and a half.”
Meanwhile, she remains concerned about the financials. JP Morgan (JPM) kicked off earnings for the financial group on Thursday.