Earnings season is upon us once again and if all goes as expected will be the second quarter of positive earnings growth for the S&P 500 since the market exit the 6 quarter earnings recession. If the quarter ends positive it will be the first time we've had two back to back positive quarters since Q4 2014 and Q1 2015. Along with this is an expectation for continued and increased earnings growth into the end of next year at least. The only thing holding the market back from a truly earnings driven rally is the fact that current and forward expectations have been in decline. What I have noticed over the past few weeks is that downward revisions have slowed and earnings growth outlook appears to have stabilized. If this is true, and economic growth does not stall, it is very possible that earnings outlook for next year could begin to rise.

Q4 earnings growth is expected to run in the range of 3% at this time. Based on long running trends we can expect to see the final rate of earnings growth come in around 7% or 8%. Looking forward Q1 and Q2 of 2017 are expected to be strong as well, expanding to 11.2% and 10.7%. I think it safe to expect some revision to both the 1st and 2nd quarter numbers as we get closer to those reporting seasons, the thing to watch for is whether they rise, fall or trend sideways.

The current trend is for quarterly expectations to fall as we approach the onset of the season. Over the course of the past year 4th quarter estimates fell from a peak near +15% to today's less aggressive 3.1%. Looking forward the real questions are how far will 1st and 2nd quarter expectations decline before they bottom, how much better than expected the actual results will be and will quarterly earnings growth maintain the expected upward trajectory?

Earnings growth has returned on an annualized basis as well. Full year 2016 is currently expected to see growth in the range of 0.10%. If the final 4th quarter rate comes in as expected this will grow to 0.2% or 0.3%. Looking forward to next year 2017 is expected to see growth in the range of 11.5% and this has been holding steady over the past 2 months.

A look to the charts shows how earnings growth has affected the market over the past 18 to 24 months. The S&P 500 entered a long term trading range at the start of 2015, the beginning of the earnings recession, and held within that range until only very recently. The index broke out to the upside with a movement that began in July as we entered the 3rd quarter and the 1st quarter of expected growth. The break out continues into the fall and end of the year, enhanced by Trumponomic outlook, and is supported by forward earnings growth expectations as well as the secular trend. Speaking of the secular up trend line, there have been 4 major bounces from that line in the last 12 months.

The technical outlook for the index is bullish in the long term. It is trending higher on a secular basis and has recently (over the past 12 months) confirmed that trend. The shorter term 150 day moving average confirms as well, as does the 150, 200 and 300 day EMA's. The indicators are consistent with an up-trending index although they both show some nearer term weakness. This weakness follows the explosive Trump Rally and break-out to new all time highs so is not unexpected. Assuming that economic data and the 4th quarter earnings cycle unfold as expected the index is likely to consolidate at these levels until reaching the trend line again, some time in February it looks like. If near term weakness persists and the market moves below current levels downside targets for support are at 2200, -1.5%, and 2120, -5%. A retracement to these levels would be bearish in the near to short only, a break below the trend line more worrisome but still not an indication of reversal and more likely an opportune entry point for long term bullish positions.

Fourth Quarter Earnings By Sector

The Energy Sector (XLE)

The biggest story in earnings over the past 6 quarters, and the #1 cause of the earnings recession, has been the energy sector. The sector has been plagued by years of low oil prices and a supply/demand imbalance that is only now being addressed, causing a massive decline in quarter to quarter and year over year earnings growth that drove the entire sector to 5 year lows. Now, finally, thanks to a lot of OPEC talk, oil prices have begun to rise again and the sector is on the verge of showing earnings growth once again. The sector is expected to post negative growth for the quarter, -0.4%, but this is far better than the -63% last quarter and worse seen in prior quarters. The good news is that, discounting volatility, the prices for WTI and Brent are expected to rise slightly into the end of the year, driving positive earnings growth for the sector. On a year over year basis 2016 will not be a good one for the sector, -75.7%, but that changes significantly in 2017; earnings growth for next year is expected in the range of 345%.

Needless to say the earnings outlook for the energy sector is quite bullish. A look at the chart of XLE, the Energy Sector SPDR, shows the same. The ETF has broken out of a long term consolidation range and looks set to make a run higher. Upside targets on the weekly charts are near $80 and $85 but come with some caveats. The indicators are not showing a lot of strength, far from it, MACD is bullish but just bobbing along and stochastic is showing divergence from the recent highs and the possibility of correction. The daily charts show an ETF retreating from a peak, in search of support, and in danger of making a deeper correction. It is sitting on potential support at the short term moving average and is likely to test that support in the near term. The indicators are both bearish and weakening which also suggests that support is going to be tested. A break below this level, near $75, would be bearish in the near term with a target of $72. Overall assesment: bullish in the short and long term with a chance of near term weakness. Cautiously bullish.

The Telecom Sector (XTL)

The Telecom sector is expected to post the largest decline in quarterly earnings of any sector this cycle, -28%. Looking forward the picture is far rosier. The sector is expected to post positive earnings for 2017, +3.7%, although estimates have been falling. While positive earnings growth is good, 3.7% puts the sector in 7th place and not the most attractive for longer term positions.

The chart of the Telecom Sector SPDR XTL is scary looking, if you're a bull. The long term weekly chart shows an ETF that has run up on a sharp rally and is overextended. The rally was driven by positive earnings growth, but that is about to change. There are significant indications on both the weekly and daily charts that suggest correction is at hand. The weekly charts show divergence between the highs and the indicators and that is confirmed on the daily charts. The daily charts show additional weakness and confirmation of impending correction through bearish crossovers in both MACD and stochastic. Near term support is the short term moving average, a break below this would be bearish with next target near $65. Overall assessment; neutral long term with correction likely in the near to short term. Cautiously bearish.

The Industrial Sector (XLI)

The Industrial sector is expected to post the 2nd largest decline in earnings growth this quarter, -8.4%. This estimate has been falling and is down from -2.9% at the start of the quarter. Full year 2016 is not expected to see positive growth, the blended rate is -3.0% at this time. Next year should see growth return, full year estimate for 2017 is 4.2%, but whether or not it does so in the 1st quarter is yet to be seen. This sector is one that could see a surprise boost in activity in the coming year due to economic trends and the Trump agenda so there is a chance of upward revisions for the coming quarter.

The chart is generally bullish in the long and short term with signs of weakness in the near. The weekly and daily charts are in alignment and show an ETF that has hit a peak during an up trend and is in correction/consolidation. Near term support is at the $62 level, a break below here could take it down to $60 and a long term up trend line. This trend line dates back to the beginning of last year and has been tested 4 times including the the post-election rally. Based on the indicators and price action it looks like support is going to be tested, how deep depends on the data and the earnings this cycle. Overall assessment: bullish in the short and long term with a chance of consolidation or correction in the near term. Cautiously bullish.

The Real Estate Sector (XLRE)

The Real Estate sector is expected to post the 4th largest decline in earning growth this quarter. On top of that it has seen the largest amount of downward revisions since the start of the quarter and forward outlook is gloomy. Full year 2016 is still expecting to see growth, +17.9%, but 2017 is not. The 4th quarter 2016 is the first of negative growth since the sector was spun off and that negative growth increases over the next few quarters leaving full year 2017 estimates at -20.5%. The concern of course is that with rising interest rates will come a decline in the value of real estate. The thing to be wary of is pent up demand, demand that is only growing as the economy strengthens, that could continue to drive this sector in the face of rising rates.

The chart of the Real Estate Sector SPDR XLRE does not look bullish. The ETF has been in down trend for the past 6 months and may be winding up for another leg lower. It has been bobbing around the $30 $31 level for the past month or so, near it's initial trade price set just over a year ago, and doesn't look like it's ready to break out in either direction just yet. Based on the earnings outlook I would hazard a guess it will break out to the down side. Resistance is at $31 or just above, support in the range of $29 to $30. General assessment: neutral in the near and short, bearish in the long. Neutral.

Consumer Discretionary

The Consumer Discretionary sector is expected to post the smallest amount of positive earnings growth this cycle, 0.83%. This is down from just over 6% at the start of the quarter but likely a low ball estimate as is the norm these days. Two things that may hurt results in this sector is a less than expected pace of auto sales and tight housing markets. Looking out to next year earnings growth is expected to hold steady at 9% but will likely come in stronger. Positive factors that may lead to unexpected strength in the sector include labor trends and slowly rising wages.

Earnings outlook is neutral at best; this quarter will show growth, maybe next quarter too, but growth has peaked and expected to decline into the end of the year. The technical outlook is about the same. The Consumer Discretionary SPDR XLY has peaked with a new all time high and looks like it could decline in the near to short term. The weekly charts shows an ETF that has been trending higher over the long term and recently broken out of a consolidation range. The daily charts shows an ETF that has been trending within a long term trading range for 2 years and recently broken out to the upside. The break out is weak, the indicators highly divergent, suggesting a whipsaw or false break, at least a test for strong support. Support target is near $80.50 and the 150 day EMA, a break of this level is bearish in the near to short term and would confirm the trading range. General assessment: neutral/bearish in the near and short term, bullish in the long. Cautiously bullish.

The Materials Sector (XLB)

The Materials sector is expected to post earnings growth of 3.6% for the 4th quarter. This is down a whopping 15.8 points from the +19.4% expected at the start of the quarter. The silver lining is that the sector has emerged from earnings recession with expanding growth into the end of the year. In terms of year over year growth 2016 is expected to post a decline in earnings of -3.6% with 2017 coming in near 16%. In addition to positive earnings growth this sector has also seen expectations tick higher in recent weeks, up 0.1%, possibly driven by Trumponomics, his plans for infrastructure spending and boosting business/job creation.

Earnings outlook for the Materials SPDR XLB is bullish although the charts paint a mixed picture. The longer term weekly charts are bullish but show an ETF retreating from resistance near $52 and the all time high. The indicators are bullish in the longer term but consistent with nearer term weakness. The shorter term daily charts show an ETF that has already seen a fairly large decline from its highs, about -4%, and is sitting on potential support. Support is the short term 30 day moving average, a break below which would take the ETF down to the 150 day near the $48 level. Overall assessment; bullish in the short and long term with a chance of near term weakness. Cautiously bullish.

The Healthcare Sector (XLV)

The Healthcare Sector. In terms of earnings growth outlook the sector looks good and is expected to post growth of 3.9% for the 4th quarter and 6.4% growth for all of 2016 with that expanding to 8.5% in 2017. In terms of market risk this may be the riskiest sector for investors next year due to a variety of factors including regulatory interest in the high cost of medicine and the uncertain status of Obamacare. I still don't like it and am keeping my distance.

The chart of the Healthcare Sector SPDR XLV looks a lot like a market winding up with no idea where it should go next. The ETF has been trending sideways within a range for over a year now and recent action has produced a triangle pattern within that range. On the weekly chart the indicators show a market bouncing up from support while on the daily they show one that is moving down from resistance. What both charts have in common is that the indicators are consistent with the trading range over the long term. In the near term support is near $68 with resistance near $71. A break of either side could produce a move of $5 to $6 before hitting the upper or lower range boundary. General assessment: Bullish long term, neutral short term and bearish near term. Neutral.

Consumer Staples

The Consumer Staples sector is expected to post the fourth largest increase in earnings this quarter, 4.0%. Estimates have fallen from the first of the quarter but have stabilized recently and led to an increase full year estimates. Full year 2016 is expected to come in around 4.3%, up 0.3% in the past 2 months. Looking out to next year growth is expected to continue and expand to 6.8%. The sector looks solid in terms of earnings but is still only average when compared to the rest of the sectors.

Despite the only middling forecast for earnings growth the technical forecast for the Consumer Staples SPDR XLP is bullish. The weekly charts shows an ETF that has consolidated within an uptrend, retreat to test support and is now bouncing up from that support. The indicators are consistent with a test of support within an uptrend and have confirmed the bounce with bullish crossovers. The daily chart shows much the same, an ETF that has bounced from long term support, near $50, and is confirmed by the indicators. In the very near term, the ETF has broken above potential resistance at $51.50 and is now consolidating there. This new support level is confirmed by the 30 day moving average, next upside target for resistance is the 150 day moving average near $52.50. A break above that level would be bullish and could take prices up to the $54-$56 level, just below all time highs. General assessment: near term neutral, short and long term bullish. Bullish.

Information Technology

The Information Technology sector is expected to post the 3rd largest increase in year over year earnings growth for the 4th quarter, 6.0%. This sector has also seen estimates rise in recent months which, alongside forward outlook, give the forecast a more bullish tone. Full year 2016 earnings growth is expected in the range of 4.7% with growth expanding in 2017 to 11.1%. Economic trends and a strengthening consumer were already supporting outlook, lower corporate taxes and more jobs only helps although I am sure there will be winners and losers.

The chart of the Information Technology Sector XLK shows an ETF that has been in a long up trend and may have hit a peak. The weekly charts are bullish in terms of price action but divergences in the indicators suggest there is some weakness present. The daily charts show an ETF that has hit a peak and begun to pull back although convergences in the indicators suggest that the high will be at least retested if not broken. Together the charts suggest that the sector is still in up trend and experiencing a normal consolidation/correction that will lead to further upside. Near term support is the short term moving average near $48.30, a move below this may find support in the range of $47.50 to $48. General assessment: bearish in the near term, bullish in the short to long term. Cautiously bullish.

The Financial Sector (XLF)

The Financial Sector is expected to post the 2nd largest increase in year over year earnings this quarter, 14.4%, and is expected to be one of the strongest sectors next year as well with full year growth of 11.2%. Full year 2016 is only expected to see growth of 0.3%. Among the many things supporting earnings in this sector are the strengthening economy, the strengthening consumer and more importantly for us now, rising interest rates. As interest rates rise so too will the earnings potential of the financial in general.

The chart of the Financial Sector SPDR XLF looks strong in the long and short term although there is some near term weakness. The near term weakness is to be expected following the explosive post-election rally. On the weekly chart the ETF has made a new high dating back to before the 2008 financial crisis and this move is confirmed by the indicators. Both MACD and stochastic are confirming with bullish crossovers; MACD is showing strength with an extreme peak, stochastic with a cross of the upper signal line. On the daily charts the indicators are consistent with an up trending market but one that has hit a peak and looking for strong support. Near term support is near $23 and the short term moving average, a break below here could take it down to $22 or $21 before finding next support. Resistance is just below $24, a break above this would be bullish. General assessment: bearish near term, bullish short and long term. Cautiously bullish.

The Utilities Sector (XLU)

The Utilities Sector is expected to post the largest increase in quarterly earnings, nearly 20%, with 7.9% growth for the full year 2016. Forward outlook isn't bad but it isn't good either, growth for 2017 is expected to stall leaving earnings flat for the year. While no reason to get bearish flat earnings are also no reason to get bullish, certainly not with double digit growth expected for 4 sectors.

The chart of the Utilities Sector SPDR is about what you'd expect, bullish over the long term but showing weakness in the short and near term. The ETF hit a peak earlier this year as earnings growth and dividends supported the market and has since entered a trading range. The daily charts show an ETF that is trending higher within the range and poised to move up to the upper boundary. Near term support is along the short term moving average, confirmed by the long term moving average, near the middle of the range at $48.50. General assessment: bullish near term, neutral short and long term. Neutral/bullish.

My Conclusion

I am cautiously bullish on the market in general. Earnings growth is back, it is expected to expand into the end of the year at least and is supported by economic trends and the prospects of Trumponomics. Out of the 11 S&P 500 sectors I am neutral with a bullish bias on 1 sector, cautiously bullish on 6 sectors and bullish on 1. I am only bearish on 1 sector, telecom, and only cautiously so. Of those I am bullish on the one that really stands out is the Consumer Staples which appears to have already corrected, consolidated and bounced from long term support as I have been expecting the broad market to do. The caveat is that the broad market may not move lower before it moves higher, or if it does it may not move as much lower as I suspect is possible, or it may move even lower than I suspect simply because we're all waiting for such an event to happen. Whatever happens the long term outlook is bullish and so am I. Now all we have to do is wait for the earnings season to unfold. Alcoa kicks off the season Monday, January 9th and will be reporting for the first time since the company split in two.

Until then, remember the trend.

Thomas Hughes