HSBC offers a list of stocks that markets and investors have been overlooking
Earnings expectations for companies like Charles Schwab have been revised up, yet markets haven't rewarded that, says HSBC.
Investors have more questions than answers right now. Will third-quarter earnings deliver and keep the bull market in stocks going? Will the artificial-intelligence investment boom driving that bull market slow down?
They may get the answer to yet another question - will the Federal Reserve keep hiking interest rates and potentially derail stocks? - with a crucial consumer-price report coming early Wednesday.
As for earnings, some razzle dazzle is expected, with consensus annual growth expectations for third-quarter earnings for the S&P 500 SPX at 30%, notes HSBC's head of U.S. and Latin American equity strategy, Nicole Inui.
Most of the anticipated growth is from semiconductors and energy stocks, but beneath the surface of those power players, earnings forecasts are more muted, she says.
In our call of the day, Inui thinks unexpected earnings strength could show up in sectors and stocks where investors least expect, and might just drive a hoped-for broadening in stock market performance.
"Only five of the 11 sectors within the S&P index are expected to deliver at least 10% growth in Q3, compared with nine in the previous quarter," Inui tells clients in a note published Tuesday. "Energy is forecast to lead, supported by sustained oil-price strength, while technology growth is largely led by semiconductors."
Earnings excluding the Magnificent Seven, tech and energy are seen growing just 5% on an annual basis, down from 14% in the previous quarter. Financials are seen growing by around 5%, owing to tougher comparisons and pressure from higher bond yields, she says.
Tuesday's results from JPMorgan, Goldman Sachs and others showed consumers are still borrowing even with high interest rates.
"Expectations for consumer discretionary, consumer staples, real estate and utilities are similarly muted," says the HSBC strategist. "Positive surprises from these unloved sectors could drive a broadening in market performance."
Inui notes that U.S. economic activity continues to hold up better than foreseen, "creating scope for companies operating in the lower-expectation areas of the market to deliver earnings beats." If those currently underappreciated sectors come through, earnings leadership could broaden out, she says.
Inui offers a screen of S&P 500 companies where earnings estimates have been revised higher, yet valuations appear low and share prices have dropped.
MarketWatch has simplified the screen for reader ease:
Ticker Stock Sector Latest 12-month forward price/earnings estimate Latest three-month earnings revision (%) Latest three-month price performance (%) 5-year price/earnings historical percentile (0 = Cheapest) STX Seagate Technology Information Technology 19.8x +43.4% -2.4% 60th CNC Centene Corporation Health Care 32.1x +30.3% -1.7% 62nd HOOD Robinhood Markets Financials 39.8x +25.5% -3% 34th WDC Western Digital Information Technology 17.5x +24.9% -23.8% 65th MCHP Microchip Technology Information Technology 19.1x +21.2% -7.3% 48th TXN Texas Instruments Information Technology 29.4x +19.3% -1.5% 57th GNRC Generac Holdings Industrials 18.6x +18.2% -6.1% 48th DASH DoorDash Consumer Discretionary 46.8x +17.3% -2.3% 3rd TTWO Take-Two Interactive Communication Services 24.2x +14.2% -20.9% 23rd GOOGL Alphabet Class A Communication Services 21.5x +13.3% -4.5% 63rd GS Goldman Sachs Financials 12.5x +13.2% -14.9% 67th DOC Healthpeak Properties Real Estate 71.0x +13.1% -14.9% 68th JBL Jabil Inc. Information Technology 16.6x +12.8% -6.7% 72nd VRT Vertiv Holdings Industrials 28.7x +12.6% -19.3% 58th HWM Howmet Aerospace Industrials 35.9x +12.5% -19.1% 67th SCHW Charles Schwab Financials 12.5x +12.4% -6.2% 0th IBKR Interactive Brokers Financials 28.1x +12.4% -7.2% 77th PKG Packaging Corp. of America Materials 17.7x +12% -2.2% 40th UNH UnitedHealth Group Health Care 17.2x +11.6% -12.2% 22nd PCAR PACCAR Industrials 15.4x +11.3% -14.1% 73rd XYZ Block Financials 15.4x +10.3% -1.9% 10th LLY Eli Lilly Health Care 26.4x +9.8% -3.8% 8th
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