What To Buy Before The Q2 Earnings Season Kicks Off

The Q2 Season Could Be A Turning Point For The Market 

The outlook for the Q2 earnings reporting season is about as cloudy as it could be. Between uncertain supply chain improvement, wildly out-of-control inflation, rising energy prices, and an aggressive FOMC there is a real chance the season could be a bloodbath. Within the outlook, however, there are signs the quarter could be a turning point for the market but we’re not ready to call a bottom in equities just yet. Until then, some rays of light within the Q2 season suggest the Energy Sector (NYSEARCA: XLE) and the Materials Sector (NYSEARCA: XLB) are the best targets for speculators and investors. 

The Energy Sector Is Where Most Of The Profits Will Be

The consensus estimates for the Q2 season steadied and even ticked higher over the past few weeks but we don’t read too much into that. Seven of the eleven S&P 500 sectors have lower growth targets today than they did at the start of the quarter and the estimates for those sectors continue to fall. The reason the consensus target is holding steady and even creeping higher is 100% because of the energy market. The outlook for the energy sector is for YOY earnings growth in the range of 213% and that is up more than 7500 basis points since the start of the quarter and we see ample potential for an upside surprise. The price of WTI is edging lower from its most recent high but that high is within spitting distance of the all-time high and the price has been trending well above the Q1 2022 average. 

And if the consensus for earnings isn’t enough, the Energy Sector is by far the most upgraded sector over the past 90 days. Energy stocks account for 6 of the top 10 most upgraded stocks over the past three months and 13 of the top 20 with upgrades and price target increases still rolling in. Devon Energy (NYSE: DVN), Exxon-Mobil (NYSE: XOM), and Chevron (NYSE: CVX) are among the most upgraded stocks and the leading energy stocks over the past 30 days. Assuming we’re right about the actual results, we see the Energy Sector SPDR hitting a bottom very soon and reversing higher by the end of the reporting season. Exxon and Chevron will report the last week of July, Devon Energy reports the first week of August. 

The Materials Sector Is Getting Upgraded, Too 

The Industrial Sector has a better outlook for earnings growth than the Materials Sector but the Materials Sector is getting strong upgrades. The outlook for earnings in this sector is up 800 basis points over the last 3 months compared to a much smaller 400 basis point increase for the Industrials. While we are viewing both sectors bullishly, we think the Materials Sector has a better chase for outperformance and upgrades to the guidance. 

On an industry basis, all four sub-industries are experiencing the tailwind but one stock stands out as a clear winner, Teck Resources (NYSE: TECK). Teck Resources is a diversified play on mining with operations in steel-making coal, precious metals like copper, gold, and silver, and industrial metals like lead and zinc, and even phosphorous for fertilizer. The company is the single most upgraded stock in the sector and the 6th most upgraded stock this quarter. Turning to the charts, both Tech Resources and the Materials Sector experienced a sharp correction on fears of an economic slowdown that have them trading at the lowest levels in months.