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When almost the entire market is worried about overvaluation, U.S. blue-chip companies have brought sweet surprises for investors in the form of revenue growth. As per an article published on Financial Times, revenue growth at blue-chip US companies like JPMorgan (JPM - Free Report) , Visa (V - Free Report) and Caterpillar (CAT - Free Report) are beating analyst expectations at almost the decade-best rate (read: 4 Sector ETFs Winning on Revenue Growth).
As per the Earnings Trends issued on July 26, 2017, about 34.2% of the S&P 500 companies have reported this reporting cycle. Among these, 70.8% companies beat top-line estimates while 78.9% beat on the bottom line.
Why Revenue Growth is a Bullish Sign
Investors should note that sales are harder to be influenced in an income statement than earnings. A company can land up on decent earnings numbers by adopting cost-cutting or some other measures that do not speak for its core strength. But it is harder for a company to mold its revenue figure.
Secondly, according to chief investment officer of Fiduciary Trust, when corporate revenues are rising in a low inflation backdrop like this, it signifies “true demand-based revenue increase”. These gains are likely to be volume driven, not realization driven, which points to a recovering consumer segment. A still-low interest rate environment and energy prices maybe have been boosting the consumer area.
Weaker Dollar: A Boon for Blue Chips
The year 2017 has been all about greenback weakness, with the U.S. currency ETF PowerShares DB US Dollar Bullish ETF (UUP - Free Report) losing about 8.7%. The fund has dived over 5% in the last three months (as of July 28, 2017) (read: Rising ETFs in a Falling Dollar Environment).
Political uncertainty in the Trump administration has kept the greenback from soaring. Investors should also note that lower-than-expected expansion in the fiscal policy given the ongoing political drama has prompted the IMF to downgrade U.S. growth to 2.1% for 2017 and 2018 from the previous projections of 2.3% and 2.5%, respectively.
The Fed also stayed away from an extremely aggressive policy tightening – after two rate hikes this year – due to subdued inflation (read: ETF Winners & Losers on IMF Growth Forecast).
This makes us think that this is the right time to bet on large-cap stocks rather than the smaller ones. Large-cap stocks perform better in a weaker dollar environment since the former has substantial foreign exposure. So, negative currency translation risk gets minimized in a falling dollar environment.
Financial Times reported that an analyst with AllianceBernstein indicated, “the weaker dollar appears to be a factor this season as global companies have posted 300 basis points better growth than those with higher domestic revenue exposure.”
Global Economy on the Mend
Since large-caps rely heavily on foreign economies, the health of the Euro zone, Japan and emerging economies is very important in taking investing decisions. The IMF upgraded 2017 GDP growth projections for the Euro zone by 0.2 percentage points from April to 1.9%. High levels of public investment also led IMF to beef up its Chinese growth forecast.
The IMF also nudged up the 2017 growth forecast for Japan to 1.3%, from 1.2% forecast in April. Emerging markets, as a whole, are also better placed now. All these point at better demand from foreign economies.
ETFs to Play
If you are convinced by the above-mentioned reasonings, you can try a few large-cap ETFs mentioned below.
SPDR Dow Jones Industrial Average ETF (DIA - Free Report)
The fund comprises 30 blue-chip U.S. stocks. Industrials, information technology, financials and consumer discretionary are the top four sectors of the fund. The fund charges 17 bps in fees.
First Trust Mega Cap AlphaDEX Fund
The underlying index of the fund tracks the performance of stocks on the NASDAQ AlphaDEX Mega Cap Index. The fund is heavy on healthcare and information technology, though the other sectors have considerable exposure to it. Its expense ratio is 0.70%
Stocks in the fund are graded on the basis of the top line. Consumer cyclical, health care, consumer non-cyclical, financials and industrials are five of the leading sectors. The fund charges 39 bps in net fees.
This fund seeks to track the CRSP US Large Cap Index, which measures the performance of a variety of stocks of large U.S. companies. The product holds 610 stocks, which are well spread across each component. Technology, financials, healthcare, consumer services and consumer goods all have a double-digit weight in the fund. It charges 6 bps in fees.
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Why You Should Bet on Blue Chip ETFs Now
When almost the entire market is worried about overvaluation, U.S. blue-chip companies have brought sweet surprises for investors in the form of revenue growth. As per an article published on Financial Times, revenue growth at blue-chip US companies like JPMorgan (JPM - Free Report) , Visa (V - Free Report) and Caterpillar (CAT - Free Report) are beating analyst expectations at almost the decade-best rate (read: 4 Sector ETFs Winning on Revenue Growth).
Oil-service bellwether Halliburton (HAL - Free Report) , fast food giant McDonald’s (MCD - Free Report) and social-media darling Facebook surpassed sales expectations last week (read: Decent Oil Service Earnings Fail to Perk Up ETFs).
As per the Earnings Trends issued on July 26, 2017, about 34.2% of the S&P 500 companies have reported this reporting cycle. Among these, 70.8% companies beat top-line estimates while 78.9% beat on the bottom line.
Why Revenue Growth is a Bullish Sign
Investors should note that sales are harder to be influenced in an income statement than earnings. A company can land up on decent earnings numbers by adopting cost-cutting or some other measures that do not speak for its core strength. But it is harder for a company to mold its revenue figure.
Secondly, according to chief investment officer of Fiduciary Trust, when corporate revenues are rising in a low inflation backdrop like this, it signifies “true demand-based revenue increase”. These gains are likely to be volume driven, not realization driven, which points to a recovering consumer segment. A still-low interest rate environment and energy prices maybe have been boosting the consumer area.
Weaker Dollar: A Boon for Blue Chips
The year 2017 has been all about greenback weakness, with the U.S. currency ETF PowerShares DB US Dollar Bullish ETF (UUP - Free Report) losing about 8.7%. The fund has dived over 5% in the last three months (as of July 28, 2017) (read: Rising ETFs in a Falling Dollar Environment).
Political uncertainty in the Trump administration has kept the greenback from soaring. Investors should also note that lower-than-expected expansion in the fiscal policy given the ongoing political drama has prompted the IMF to downgrade U.S. growth to 2.1% for 2017 and 2018 from the previous projections of 2.3% and 2.5%, respectively.
The Fed also stayed away from an extremely aggressive policy tightening – after two rate hikes this year – due to subdued inflation (read: ETF Winners & Losers on IMF Growth Forecast).
This makes us think that this is the right time to bet on large-cap stocks rather than the smaller ones. Large-cap stocks perform better in a weaker dollar environment since the former has substantial foreign exposure. So, negative currency translation risk gets minimized in a falling dollar environment.
Financial Times reported that an analyst with AllianceBernstein indicated, “the weaker dollar appears to be a factor this season as global companies have posted 300 basis points better growth than those with higher domestic revenue exposure.”
Global Economy on the Mend
Since large-caps rely heavily on foreign economies, the health of the Euro zone, Japan and emerging economies is very important in taking investing decisions. The IMF upgraded 2017 GDP growth projections for the Euro zone by 0.2 percentage points from April to 1.9%. High levels of public investment also led IMF to beef up its Chinese growth forecast.
The IMF also nudged up the 2017 growth forecast for Japan to 1.3%, from 1.2% forecast in April. Emerging markets, as a whole, are also better placed now. All these point at better demand from foreign economies.
ETFs to Play
If you are convinced by the above-mentioned reasonings, you can try a few large-cap ETFs mentioned below.
SPDR Dow Jones Industrial Average ETF (DIA - Free Report)
The fund comprises 30 blue-chip U.S. stocks. Industrials, information technology, financials and consumer discretionary are the top four sectors of the fund. The fund charges 17 bps in fees.
First Trust Mega Cap AlphaDEX Fund
The underlying index of the fund tracks the performance of stocks on the NASDAQ AlphaDEX Mega Cap Index. The fund is heavy on healthcare and information technology, though the other sectors have considerable exposure to it. Its expense ratio is 0.70%
Oppenheimer Large Cap Revenue ETF (RWL - Free Report)
Stocks in the fund are graded on the basis of the top line. Consumer cyclical, health care, consumer non-cyclical, financials and industrials are five of the leading sectors. The fund charges 39 bps in net fees.
Vanguard Large-Cap ETF (VV - Free Report)
This fund seeks to track the CRSP US Large Cap Index, which measures the performance of a variety of stocks of large U.S. companies. The product holds 610 stocks, which are well spread across each component. Technology, financials, healthcare, consumer services and consumer goods all have a double-digit weight in the fund. It charges 6 bps in fees.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>