This week kicks off third quarter earnings season, with most U.S. financial companies reporting results. Industrials will follow in the weeks ahead. Expectations are extremely low, as a number of companies have pre-announced bleak results caused by a strong dollar (which lowers the value of foreign revenues) and global economic weakness. Lower commodity prices will also negatively impact results for commodity-levered entities such as energy and materials companies. Overall, profits for S&P 500 companies are expected to decline 5.4% in the quarter. While these results sound troubling, there are a few bright spots in corporate America that we are focusing on and that our corporate bond positions are tilted towards. Namely, domestically sensitive entities such as financials, certain technology companies that are market leaders and real-estate companies focused on healthcare should fare quite well. As we mentioned last week in our note about the corporate credit cycle, credit spreads have widened out recently and currently offer strong value for shorter-dated bonds. So while the headlines may be predominantly negative, the underlying details within the earnings season data are the truly important things to focus on.
Source: Wall Street Journal