Given the current weak operating environment for most corporations, the equity market is experiencing a scarcity of growth. With that said, equity investors will be focusing on earnings growth to determine their portfolio mix going forward.

In this regard, the announcements of corporate earnings in the second quarter this year (Q2 2015), most of which will be released in the two remaining working days of this week, will provide important clues in determining growth profiles of various stocks and sectors.

Despite our expectations of an earnings contraction of 5.1 percent year-on-year (yoy) in Q2 2015 operating profits and a 4.2 percent yoy reduction at the bottom-line level for the overall market (Table 2), our latest channel checks suggest that our profit estimates may still be too aggressive.

Of particular interest will be the banking sector (some 26 percent of total market capitalization of the index), which is likely to report disappointing performance due to slow loan growth, higher non-performing loans (NPLs), soft economic growth, subdued government spending and a weak rupiah.

Note that the big-cap state-owned banks could report significantly lower earnings than our current expectations. Other sectors that are likely to report weak earnings can be seen in Tables 4 and 5.

the current depressed corporate earnings and lower earnings per share (EPS) growth in our stock universe, we further reduce our 2015 index target to 5,000 from 5,150. In 2016, we expect the index to rise to 5,500, in line with our market EPS growth forecast of nearly 11 percent yoy (Table 1).

Our recent road shows to Singapore and Hong Kong indicate that foreign investors remain wary of the government'€™s decisions to intervene in the marketplace through the implementation of various policies. With this as the most-asked question by foreign investors, policy risks from the government are likely to remain a drag on market sentiment. This, coupled with the government'€™s aggressive taxation drive, could continue to dampen economic growth and put off investors'€™ sentiment.

At this stage of the market cycle, we believe it is still too early for investors to look forward to improved prospects in the third and fourth quarter this year until investors adjust for slower overall 2015 market growth stemming from disappointments in the Q2 2015 corporate results.

Worth noting is that the Bloomberg consensus still forecasts 2015 yoy market EPS growth of 12 percent, compared to our forecast of just 5.5 percent (Table 1), suggesting that future downward earnings revisions from the street are likely. With that said, we continue to adopt a defensive stance on our stock preferences while underweighting the discretionary sector, including automotive, media and retail, on policy risks and a worse-than-expected GDP growth outlook.
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The writer is senior associate director/head of research at Bahana Securities.

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