The following is an excerpt from Zacks Chief Strategist John Blank’s full Aug Market Strategy report To access the full PDF, click here.
Let’s recap (and recast) how the Q2 earnings season has been going.
The simplest way to summarize the aggregated Q2 company data is that both earnings growth and revenue growth have been strong, as expected.
However, the most earnings surprises have been coming from three more defensive sectors, Telcos, Utilities and Health Care, which is not as expected.
This data I show you below is after 53% of S&P 500 companies reported Q2 results.
Record-High Companies Beating EPS Estimates in Q2 (83%)
Overall, 53% of the companies in the S&P 500 reported earnings to date for Q2. Of these companies, 83% reported actual EPS above the mean EPS estimate, 5% reported actual EPS equal to the mean EPS estimate, and 12% reported actual EPS below the mean EPS estimate.
The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (75%) average and above the 5-year (70%) average.
If 83% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting actual EPS above estimates for a quarter since tracking this metric began in Q3 2008.
At the sector level, Telcos (100%), Utilities (100%) and Health Care (87%) sectors have the highest percentages of companies reporting earnings above estimates. The Energy (50%) sector has the lowest percentage of companies reporting earnings (FFO) above estimates.
The first three sectors saw big Zacks Sector Upgrades this month, which is consistent.
However, Earnings Surprise Percentage (+2.5%) Below 5-Year Average
Together, companies are reporting earnings +2.5% above expectations. This surprise percentage is below the 1-year (+5.6%) average and below the 5-year (+4.4%) average.
Stock Market Rewards Surprises Once Again
To date, the market is rewarding positive earnings surprises more than average and punishing negative earnings surprises less than average.
Companies that have reported positive earnings surprises for Q2 2018 have seen an average price increase of +1.5% two days before the earnings release through two days after the earnings. This percentage increase is above the 5-year average price increase of +1.0% during this same window for companies reporting positive earnings surprises.
Companies that have reported negative earnings surprises for Q2 2018 have seen an average price decrease of -2.0% two days before the earnings release through two days after the earnings. This percentage decrease is smaller than the 5-year average price decrease of -2.5% during this same window for companies reporting negative earnings surprises.
Zacks Sector/Industry/Company August Telescope
With lots of Q2 earnings reports affecting the Zacks Industry Ranks, we have a fresh and solid appraisal of what may work for stocks in August 2018.
I would focus on Health Care and Info Tech, and in particular, drill down into stock picks in the Health Care Services industry and the Semis, once again.
However, two sectors surprised me in late summer. Both deep defensives, Telcos and Utilities, experienced big overall upgrades. The Telcos went all the way to Very Attractive.
The Trade War loser is the Consumer Staples. These stocks were very overpriced to begin with, and now they are sinking in valuations, broadly.
(1) Health Care may be the Most Attractive sector in August. The leader remains Medical Care, aka the HMOs.
Top Stock: HCA Healthcare (HCA - Free Report)
HCA Inc. is a non-governmental hospital in the U.S. providing health care and related services.
The company operates a network of acute care hospitals, outpatient facilities, clinics and other patient care delivery settings.
The company also owns and manages freestanding surgery centers, diagnostic and imaging centers, radiation and oncology therapy centers, rehabilitation and physical therapy centers, and various other facilities.
HCA Inc. is headquartered in Nashville, Tennessee.
(2) Info Tech is hot. The Semis lead, once again. Telco Equipment is strong too, as are Electronics.
STMicroelectronics N.V. (STM - Free Report)
STMicroelectronics is a global independent semiconductor company which designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer products, automotive products and industrial automation and control systems.
(3) Telcos went all the way to Very Attractive. This is a big reversal of fortune. The leader is Telco Services and Telco Equipment.
Qualcomm (QCOM - Free Report)
Qualcomm Inc. is a world leader in 3G, 4G and next-generation wireless technologies.
Qualcomm Inc. includes Qualcomm's licensing business, QTL, and the vast majority of its patent portfolio.
Qualcomm Technologies, Inc., a subsidiary of Qualcomm Inc., operates, along with its subsidiaries, substantially all of Qualcomm's engineering, research and development functions, and substantially all of its products and services businesses, including its semiconductor business, QCT.
For more than 30 years, Qualcomm ideas and inventions have driven the evolution of digital communications, linking people everywhere more closely to information, entertainment and each other.
(4) Materials are Attractive. The industry leaders here are Paper and Steel.
(5) Utilities are Attractive, another reversal, though not as strong. The leader is Utilities - Water Supply, with summer at its peak.
(6) Financials are Attractive or Market Weight. The leader is Banks & Thrifts.
(7) Industrials fell back to a Market Weight. The leader is the Conglomerates, and Railroads & Trucking. There were lots of front-running the tariffs, lifting the shippers.
(8) Consumer Discretionary is a Market Weight. The Home Furnishings-Appliance industry looks Very Attractive, however.
(9) Energy is now a Market Weight. The best in this class is the Big Integrated Oil companies. These firms play upstream and downstream, and are able to pick up the tailwinds wherever they show up, and minimize the headwinds.
(10) Consumer Staples is the caboose this time around. It’s Very Unattractive. The sole Outperformer is the Agri-business sector.