UBS forecasts that Q2 earnings for the S&P 500 (SP500)(NYSEARCA:SPY) should beat consensus estimates by more than 15%.
"Our top-down earnings model points to Q2 EPS of $51.5+, which would be earnings growth of 80%+ yoy," strategists led by Keith Parker wrote in a note this past week. "Recent revisions for earnings, sales and margins have been positive and broad across sectors and industries, with margin downgrades concentrated in a few industries."
The team looked at the sectors that have the most upside and, again, cyclicals are high on the list.
"Comparing Q2 EPS revisions to Q1 beats as well as recent EPS momentum, we see broad-based upgrades, likely led by Cons Discretionary (NYSEARCA:XLY), Financials (NYSEARCA:XLF) and Media & Enter (NYSEARCA:XLC), with solid momentum for Tech (NYSEARCA:XLK) and Industrials (NYSEARCA:XLI)," Parker writes. "Energy (NYSEARCA:XLE) and Materials (NYSEARCA:XLB) earnings momentum remains robust."
"We see mixed trends for Healthcare Equip & Svcs and Food & Bev - and much less upside for most defensive industries compared to cyclicals."
Year-to-date, XLY is up nearly 13%, while XLF is up 25%, Communications Services, which comprises most media and entertainment, is nearly 22% higher, while XLK is up 15% and XLI is up nearly 17%.
Parker also lists the themes to watch during earnings season:
Margins at peak, but drivers supportive. "Sales acceleration, productivity, price increases and operating leverage point to meaningful new margin highs near-term in our frameworks with continuing support. Cost pressures are concentrated in a few industries in our work. However, margin outlooks will be key for stocks over coming quarters and a major focus of investors amid rising inflation."
Pricing power. "Consensus expects EBIT margins for strong pricing power stocks to fall 55bp in Q2 on avg, vs. a 50bp jump in Q2 and 120bp surge in Q3 for weak pricing power. Rising input costs is a downside risk for weak pricing power stocks. Indeed, margin revisions have turned in favor of strong pricing power stocks (vs. weak), pointing to relative upside for estimates."
Payouts vs. capex. "As a % of earnings, S&P 500 dividends+buybacks are 12pp below the 10y average, pointing to a big jump in both payouts ahead. Indeed, buyback announcements have surged, and should continue to rise."