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2Q Sales Expected to Show Improvement

Alcoa will report second quarter sales and profits after the close of U.S. trading today, marking the unofficial start of earnings season. Actually, 23 companies in the S&P 500 have already reported second-quarter results. When we blend those actual results with consensus expectations for those companies that have not yet reported, we find that topline sales growth is expected to fall by 0.7 percent versus a year ago.

But that doesn’t tell the full story. As has been true in recent quarters, the energy sector is a major drag on both sales and earnings. Sales for energy sector companies are expected to drop by 26.8 percent, or a 2.7 percentage point drag on total S&P 500 sales. That implies that S&P 500 sales excluding the energy sector would be up about 2 percent from a year ago.

In the first quarter, S&P 500 sales were off 1.5 percent in total, but up 1.3 percent excluding energy. So in general, sales excluding energy are expected to improve slightly in the second quarter versus the first quarter.

For bottom line earnings per share, the overall S&P 500 is expected to show a 5.8 percent decline, with 3.7 percentage points of the drop coming from energy. This implies a 2.1 percent drop when we exclude energy companies. That compares to a 6.6 percent decline overall, and 1.3 percent decline excluding energy. Since a majority of companies often post positive surprises, the second quarter tally may still meet or beat the first quarter results.

Among the other sectors, Telecommunication Services and Consumer Discretionary are expected to show the strongest growth in earnings per share — 7.4 percent and 6.4 percent — on sales growth of 10.9 percent and 5.5 percent.

With U.S. equity markets back near all-time highs, continued gains in sales and EPS will be critical to support current and future price gains.

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