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Gone are the days when investors used to be happy with just earnings growth. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. It is the “BEAT” that matters the most.
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 Q4 reporting season. As per the Earnings Trends issued on Feb 20, 2019, as much as 89.2% of the S&P 500 market cap have already reported results. Of these, 67.1% beat on earnings in Q4 of 2018 while 62.1% surpassed revenue estimates, translating into a blended beat ratio of 45.8%.
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.
All companies of the sector reported and delivered a blended beat ratio of 60%. Of the sector, 90% companies beat on earnings while 70% came up with revenue beat ratio. The fund, however, has lost 0.9% in the past month (as of Mar 8, 2019).
Medical – SPDR S&P Health Care Equipment ETF (XHE - Free Report)
As much as 97% of the total market cap have produced a blended beat ratio of 59.6%. Of this, 74.5% companies beat on both the lines. The fund added 3.1% in the past month (as of Mar 8, 2019).
The healthcare sector appears strong. While the sector is non-cyclical in nature, it should benefit from rising merger and acquisitions as well as approvals for some novel drugs. However, the price gouging issue is still a concern (read: Best ETF Ideas for 2019).
About 92.3% of the sector market-cap delivered a blended beat ratio of 57.9%. As many as 87.7% companies beat on earnings and 63.2% surpassed top-line estimates. In any case, things are in favor of technology investing this year, making XLK a winning proposition. Decent earnings, compelling valuation and growing demand for emerging technologies have boosted the sector. XLK has been up about 2.7% in the past month (read: Hedge Fund's Buy Dip in Tech Stocks: Follow Them With ETFs?).
As much as 93.3% of the sector market cap have registered a blended beat ratio of 53.6%. There were 78.6% companies beating on earnings and 64.3% companies surpassing revenue estimates. PMR has gained about 2% in the past month (as of Mar 8, 2019).
A solid labor market, higher take-home pay amid tax reductions, subdued inflation and soaring stock market probably drove Americans' ability to spend on discretionary stocks.
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4 Sector ETFs to Play Upbeat Earnings Beat Ratio
Gone are the days when investors used to be happy with just earnings growth. Now, earnings improvement (no matter how big it is) seems inadequate for solid moves in the market. It is the “BEAT” that matters the most.
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 Q4 reporting season. As per the Earnings Trends issued on Feb 20, 2019, as much as 89.2% of the S&P 500 market cap have already reported results. Of these, 67.1% beat on earnings in Q4 of 2018 while 62.1% surpassed revenue estimates, translating into a blended beat ratio of 45.8%.
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.
Aerospace – SPDR S&P Aerospace & Defense ETF (XAR - Free Report)
All companies of the sector reported and delivered a blended beat ratio of 60%. Of the sector, 90% companies beat on earnings while 70% came up with revenue beat ratio. The fund, however, has lost 0.9% in the past month (as of Mar 8, 2019).
Rising geopolitical tensions, higher defense spending from several countries and growing commercial demand have been driving the sector (read: Trade Optimism & Earnings Effect: 5 Hot ETF Charts).
Medical – SPDR S&P Health Care Equipment ETF (XHE - Free Report)
As much as 97% of the total market cap have produced a blended beat ratio of 59.6%. Of this, 74.5% companies beat on both the lines. The fund added 3.1% in the past month (as of Mar 8, 2019).
The healthcare sector appears strong. While the sector is non-cyclical in nature, it should benefit from rising merger and acquisitions as well as approvals for some novel drugs. However, the price gouging issue is still a concern (read: Best ETF Ideas for 2019).
Technology – Technology Select Sector SPDR Fund (XLK - Free Report)
About 92.3% of the sector market-cap delivered a blended beat ratio of 57.9%. As many as 87.7% companies beat on earnings and 63.2% surpassed top-line estimates. In any case, things are in favor of technology investing this year, making XLK a winning proposition. Decent earnings, compelling valuation and growing demand for emerging technologies have boosted the sector. XLK has been up about 2.7% in the past month (read: Hedge Fund's Buy Dip in Tech Stocks: Follow Them With ETFs?).
Consumer Discretionary – Invesco DWA Consumer Cyclicals Momentum ETF (PEZ - Free Report)
As much as 93.3% of the sector market cap have registered a blended beat ratio of 53.6%. There were 78.6% companies beating on earnings and 64.3% companies surpassing revenue estimates. PMR has gained about 2% in the past month (as of Mar 8, 2019).
A solid labor market, higher take-home pay amid tax reductions, subdued inflation and soaring stock market probably drove Americans' ability to spend on discretionary stocks.
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 >>