Ruzbeh Bacha
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Ruzbeh Bacha in City Falcon,

Q2 earnings underway - will energy sector deliver or disappoint?

Big banks like $JPM$C$WFC will set the ball rolling for the Q2 earnings season with their reports pouring in on Friday this week.

As per estimates, Y/Y earnings and revenue growth in Q2 are expected to be around 7% and 5% resp. However, Q2 estimates are relying heavily on the energy sector. The energy sector is projected to report the highest earnings growth of all sectors at ~400%. Sans energy sector, the earnings growth for Q2 would be a paltry 4%. Slight Y/Y increase in prices of oil and a low base is expected to fuel the sector's momentum for the quarter. However, Q2 performance remains vulnerable to bearishness in oil prices.

Technology is expected to gain momentum backed by gains in semiconductor companies and financials are expected to benefit from a rising interest rate environment. On the other hand, a tight jobs market is expected to pull the labor-intensive consumer discretionary sector downward.The sector remains vulnerable to a rise in wages. Defensives like utilities will also remain under pressure with rising interest rates.

Overall, while sectors like energy, tech and financials are expected to lead the earnings in Q2, consumer discretionary and utilities could be a drag on Q2 performance.

Headwinds to earnings remain

Corporate earnings could suffer as interest rates go higher.Also, delays in infrastructure spending or tax reforms could further weigh on earnings. Continued earnings growth are required to support the elevated stock prices. A negative surprise to earnings could lead to sharp corrections.