One Man’s Opinion: Will Earnings Expectations Improve After The Second Quarter?

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ManBoth the S&P 500 and NASDAQ saw a surge toward the end of the week, and the rally is likely to sustain taking the indexes to the next level, said Brad McMillan, CIO at Commonwealth Financial Network.

The economy is expected not only to expand, but also accelerate. Neither consumers nor investors have factored in that scenario till now, which could be one of the triggers to drive the markets higher, he added.

Asked how far the markets could rise, Brad said equities could grow another 5-10 percent this year. The earnings expectations are still depressed. If the economy continues to expand and accelerates, sentiment should improve within the next quarter and meet expectations in the back-end of the year with housing, financials, consumer discretionary and technology (particularly for business) sectors benefiting he observed.

S&P Capital IQ expects the benchmark index to rise to 2,215 and expects healthcare and technology sectors to show stronger earnings growth, said Todd Rosenbluth, Director of ETF & Mutual Fund Research at S&P Capital IQ Global Markets Intelligence.

Both tech and healthcare are expected to witness strong growth not only in the second-quarter, but also in the second-half of the year. There are stocks in both the sectors which are still undervalued, he added.

Asked if the recent activity and chatter of M&A in the healthcare sector is driving interest, Todd said M&A activity is one of the positives that are driving some these stocks higher. The fundamentals are strong and the valuations are not rich yet.

For example, bio-technology is still trading at a discount to the broader market. For the healthcare sector, despite having seen very strong price growth, the earnings are even stronger. Investors can get diversification in healthcare with ETFs like XLV which has Pharma, biotech as well as other large-cap stocks, he noted.

Asked to comment on his views, Brad said he likes financials. As rates increase, spreads are going to increase along with a stronger growth in demand; banks would make more loans and more money on each.

Also, tech companies that sell to businesses look attractive. The economy needs to see continued capital investment and is yet to see what it needs to. As labor gets pricier, companies would need to leverage their existing labor supply more. Both of those are good growth plays, he concluded.

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