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The time when investors used to be happy with just earnings growth is long gone. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. Today, it is the beat that initiates a stock price rally post earnings.
There are plenty of reasons behind this phenomenon. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. Also, seasonal fluctuations come into play at times. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q1 reporting season. As per the Earnings Trends issued on Aug 9, 2018, as much as 91.4% of the S&P 500 members have already reported results. Of these, 79% beat on earnings in Q2 of 2018 while 72.3% surpassed revenue estimates, translating into a blended beat ratio of 61.3%.
Against this backdrop, investors must be interested in finding out sectors that have solid blended beat ratios so far this season. Below we highlight those to help investors decide on their future plays.
About 77.8% companies of the sector delivered a blended beat ratio of 79.6%. As many as 89.8% companies beat on earnings and 83.7% surpassed top-line estimates. In any case, things are in favor of technology investing this year, making PTF a winning proposition. Upbeat earnings releases, the tax reform and growing demand for emerging technologies have boosted the sector. PTF has been up about 12.2% in the past month.
All companies of the sector reported and delivered a blended beat ratio of 72.7%. Of the sector, 81.8% companies beat on both the lines. The fund has advanced 6% in the past month (as of Aug 28, 2018).
Rising geopolitical tensions, higher defense spending from several countries and growing commercial demand, thanks to growth in global economy, have been driving the sector. Plus, in mid-August, President Trump signed the $717-billion 2019 defense spending bill into law — the largest allotted to U.S. defense (read: Aerospace and Defense ETFs Rise on Strong Q2 Earnings).
All companies have produced a blended beat ratio of 72.2%. Of this, revenue beat ratio is 72.2%, while the earnings beat ratio is 88.9%. The fund added 0.8% in the past month (as of Aug 28, 2018).
Retail – Invesco Dynamic Retail ETF
As many as 47.4% companies of the sector have registered a blended beat ratio of 72.2%. There were 88.9% companies beating on earnings and 72.2% companies surpassing revenue estimates. PMR has gained 6.3% in the past month (as of Aug 28, 2018).
A solid labor market, higher take-home pay amid tax reductions and soaring stock market probably drove Americans' ability to spend and boost retail stocks, helping them tide over the sudden spike in fuel costs (read: U.S. Retail Sales Steady in July: ETFs & Stocks to Play).
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Play 4 Sector ETFs With Strong Beat Ratios
The time when investors used to be happy with just earnings growth is long gone. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. Today, it is the beat that initiates a stock price rally post earnings.
There are plenty of reasons behind this phenomenon. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend. Also, seasonal fluctuations come into play at times. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q1 reporting season. As per the Earnings Trends issued on Aug 9, 2018, as much as 91.4% of the S&P 500 members have already reported results. Of these, 79% beat on earnings in Q2 of 2018 while 72.3% surpassed revenue estimates, translating into a blended beat ratio of 61.3%.
Against this backdrop, investors must be interested in finding out sectors that have solid blended beat ratios so far this season. Below we highlight those to help investors decide on their future plays.
Technology – Invesco DWA Technology Momentum ETF (PTF - Free Report)
About 77.8% companies of the sector delivered a blended beat ratio of 79.6%. As many as 89.8% companies beat on earnings and 83.7% surpassed top-line estimates. In any case, things are in favor of technology investing this year, making PTF a winning proposition. Upbeat earnings releases, the tax reform and growing demand for emerging technologies have boosted the sector. PTF has been up about 12.2% in the past month.
Aerospace – SPDR S&P Aerospace & Defense ETF (XAR - Free Report)
All companies of the sector reported and delivered a blended beat ratio of 72.7%. Of the sector, 81.8% companies beat on both the lines. The fund has advanced 6% in the past month (as of Aug 28, 2018).
Rising geopolitical tensions, higher defense spending from several countries and growing commercial demand, thanks to growth in global economy, have been driving the sector. Plus, in mid-August, President Trump signed the $717-billion 2019 defense spending bill into law — the largest allotted to U.S. defense (read: Aerospace and Defense ETFs Rise on Strong Q2 Earnings).
Basic Materials – Invesco S&P SmallCap Materials ETF (PSCM - Free Report)
All companies have produced a blended beat ratio of 72.2%. Of this, revenue beat ratio is 72.2%, while the earnings beat ratio is 88.9%. The fund added 0.8% in the past month (as of Aug 28, 2018).
Retail – Invesco Dynamic Retail ETF
As many as 47.4% companies of the sector have registered a blended beat ratio of 72.2%. There were 88.9% companies beating on earnings and 72.2% companies surpassing revenue estimates. PMR has gained 6.3% in the past month (as of Aug 28, 2018).
A solid labor market, higher take-home pay amid tax reductions and soaring stock market probably drove Americans' ability to spend and boost retail stocks, helping them tide over the sudden spike in fuel costs (read: U.S. Retail Sales Steady in July: ETFs & Stocks to Play).
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 >>