What to Watch in Q3 Earnings Season

Earnings season is upon us once again and investors will have their eyes on a number of recurring themes, as well as some new ones, in light of the recent equity market turbulence matched with lackluster global growth expectations.

For earnings-related matters we’re happy to reference an authority in the space, FactSet, and specifically their most recent insights.

To set the tone for the season, Q3 2015 earnings growth is estimated to come in at negative 5.1% compared to negative 1.0%, which was the forecast at the start of the quarter (June 30). Now, to put this into historical perspective, consider the fact that the last time the S&P 500 saw a decline in both bottom-up EPS estimates and its value for two straight quarters was back in 2011.

Company Talking Points

Before we get too hung up on estimates, let’s recap some of the biggest themes that are likely to come up in company conference calls this quarter:

• A persistently strong U.S. dollar relative to both the euro and yen continues to hurt overseas sales.
• The long-term ripple effect of lower oil and gas prices has yet to be felt in other sectors, and companies will likely continue to reiterate that they are flexible.

Earnings Revisions

Traders and investors alike may also find it useful to keep these other developing trends, highlighted below, in mind as they look for opportunities in the coming weeks:

• Since the start of Q3, the materials sector has seen the largest downward revision in growth estimates, from negative 1.5% to negative 13.7%; in the same period, the only sector to have seen an improvement in earnings estimates has been telecom services, from 16.1% to 17.8%.
• The consumer discretionary sector is expected to report the second-highest earnings growth rate this season at 10.3%, led by the auto manufacturer and Internet retail industries, which are expected to post blistering earnings growth of 51% and 41%, respectively.
• Energy is expected to report declines of 64.5% in earnings year-over-year; to put this sharp decrease into perspective, if this sector were excluded, then the aggregate estimated earnings growth for the S&P 500 Index would go from negative 5.1% to positive 2.3%. Within the sector, oil and gas refining and marketing, and oil and gas storage and transportation (think MLPs) are the only sub-industries expected to post positive earnings growth this quarter, at 22% and 7%, respectively.

There’s a plethora of ways to execute, and supplement, your investment ideas during earnings seasons. For starters, use the ETF Trading Cheat Sheet to quickly and easily find the tickers for the sectors and industries that you may want to trade.

Be a Contrarian

If you want to trade against the herd, consider the sector breadth readings below compiled by Bespoke:

As you can see, the health care sector offers the most “beaten down” opportunities by far, whereas the utilities sector might present some ripe short-sell setups.

Amplify Your Bets

ETFs make it easy to add leverage to your strategy without the need for borrowing on margin. Use the ETFdb Screener to find leveraged ETFs that target the assets you wish to trade; be sure to read about the risks and nuances associated with these products.

See also: Should You Use Leveraged ETFs Over the Long Haul?

Expand Your Options

For more seasoned investors, the use of options can greatly expand the range of strategies available at your disposal. For starters, consider using a bull call spread or a bear put spread for making a leveraged directional bet with clearly defined downside.

There’s a plethora of ways to take advantage of the multitude of ETFs out there, and especially so during earnings season. Just be sure to take precautions like utilizing limit orders and stop-losses when executing any sort of ETF trade.

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