The following is an excerpt from Zacks Chief Strategist John Blank’s full Apr Market Strategy report To access the full PDF, click here.
April has arrived.
A potential for a major trade war with China weighs heavily upon the market’s mind.
I supply you with more background on how this might play out. The global narrative the market is listening to offers a chaotic mix of contradictions, with positives and negatives.
There are 60 days to go before major China tariffs are to be imposed. Until then, watch the China-U.S. trade negotiations undertaken by the U.S. Treasury.
It won’t be the only political theater available. This is just the most hopeful one.
Zacks April Global Outlook
For a Global Outlook I make Five Points in April. Unfortunately, they contradict each other.
(1) Trade War now the Biggest “Tail Risk” to the Stock Market…
(2) However, Rotation to Global Growth Sectors Must Be Favored, Based on EPS Outlooks.
- The estimated earnings growth rate for the S&P 500 for Q1 2018 is 17.0%.
– For companies that generate more than 50% of sales inside the U.S., the earnings growth rate is 16.1%.
– For companies that generate less than 50% of sales inside the U.S., the earnings growth rate is 19.3%.
- Global Exposure Double Sales Growth!
– The estimated sales growth rate for the S&P 500 for Q1 2018 is 7.2%.
– For companies that generate more than 50% of sales inside the U.S., the sales growth rate is 5.8%.
– For companies that generate less than 50% of sales inside the U.S., the sales growth rate is 11.4%. This is the best reason to stick with global growth stocks.
(3) What Sectors Drive the Expected Outperformance of S&P 500 Companies with Higher Global Revenue Exposure?
• At the sector level, the Info Tech, Energy, and Materials sectors are projected to be the largest contributors to earnings and revenue growth in Q1-2018 for S&P 500 companies with more global exposure.
• At the sector level, Info Tech (60%),Health Care (58%), and Energy (57%) sectors also have the highest percentages of Buy ratings, from covering analysts.
• Take Energy off the list. With close to 990 Horizontal Fracking rigs up and running in N. America, the oil price outlook is not favorable (basically flat to $2 a barrel down)
(4) “Canary in the Coal Mine”
The Trade War issue is a big problem for Japan right now. The Yen is being used as a safe haven, in a U.S. political environment that has ratcheted up worry over a trade war. 106 on the Yen is safe haven driven. Keep your eyes on the Yen as the proxy for Trade War uncertainty.
(5) The Current Monthly Pace of European Central Bank Bond Buying: €30 billion.
It is intended to run to the end of Sept. 2018, or beyond, if necessary. Keep this stimulus in mind.
Zacks April Sector/Industry/Company Telescope
April Zacks Industry Ranks shows EPS upside leaders to be international revenue growth related.
The three sector leaders were the most exposed internationally: Info Tech, Industrials, & Materials specifically.
The fourth strong sector was Consumer Discretionary. Such sector strength says there remain internal cyclical domestic drivers within a profitable, earnings-driven, late stage economy. The low 4.0% U.S. unemployment rate must matter.
A number of sectors fell back to a Market Weight in April: Financials, Energy, Health Care, and Consumer Staples. That happens when earnings season reporting is not underway.
Utilities rose in April. So did Telcos. But the sector defensives remain at the back.
1) Info Tech stays HOT and Very Attractive. Misc. Tech is the new leader, although Semiconductors stay as a top niche again in April. Electronics is another hot Tech industry to watch.
Zacks #1 Rank (STRONG BUY) Stock: Micron (MU - Free Report)
(2) Industrials stay Very Attractive. The leaders in order: Machinery, Aerospace & Defense, Pollution Control, and Metal Fabricating.
Zacks #1 Rank (STRONG BUY) Stock: Schneider Electric SE (SBGSY - Free Report)
(3) Materials stay Very Attractive. The 2 leaders are Paper and Containers & Glass.
Zacks #1 Rank (STRONG BUY) Stock: WestRock Company (WRK - Free Report)
(4) Consumer Discretionary stays Attractive. Leaders are Home Furnishing-Appliance, Autos-Tires-Trucks, Electronics and Other Consumer Discretionary.
(5) Financials sinks to a Market Weight. The strong spot is Insurance. After that, Major Banks. Then, it settles into “Muddle Through” industry ranking here.
(6) Energy sinks to Market Weight. The 2 leaders are Coal and Oil Exploration & Production. Nothing pops up after that.
(7) Health Care sinks to Market Weight. The soft leader stays Medical Care.
(8) Consumer Staples sinks to Market Weight. The sole strong industry is Food.
(9) Utilities rise to Market Weight. Utilities-Gas Distribution looks great.
(10) Telco Services rise up to Unattractive.