The following is an excerpt from Zacks Chief Strategist John Blank’s full Aug Market Strategy report To access the full PDF, click here >>

Welcome to Zacks August market strategy report.

There is much to discuss --on tactical shifts underway in U.S. and global markets.

Multiple asset allocation changes need to be unveiled.

U.S. Market Comment   

The earnings recession of 2019 continues unabated.

On August 2nd, the blended S&P500 index earnings decline for Q2-19 is -1.0%. Yet this was smaller than the earnings decline of -2.7% last week.

If -1.0% is the actual decline for the quarter, it will mark the first time the S&P500 index has reported two straight quarters of y/y declines in earnings since Q1-16 and Q2-16.

• Four sectors have reported y/y earnings growth. Health Care (+8.0%) and Financials (+5.2%) lead that group.
• Seven sectors have reported a y/y decline in earnings. Materials (-17.8%), Industrials (-10.3%), and Info Tech (-7.6%) lead that group.

On August 2nd, the blended revenue growth rate for Q2 is +4.1%. This is above the revenue growth of +3.9% last week. If +4.1% is the final growth rate for Q2, it will mark the lowest revenue growth rate for the index since Q3-16 (it was +2.7% then).

• Eight sectors report y/y growth in revenues. Communication Services (+14.5%) and Health Care (+13.4%) lead the way.
• Two sectors reported a y/y decline in revenues. Materials (-17.5%) stink most.
• One sector (Industrials) reported no growth (0%) in revenue.

Looking at 2H-19, analysts foresee a decline in earnings for Q3 followed by mid-single-digit earnings growth in Q4.

The basic S&P500 sector points – to apply to the U.S. China trade war -- are below.


 
If a given S&P500 sector’s international revenue exposure exceeds 50% (Info Tech is 58% and Materials is 55%), that sector’s earnings suffer more from Trade War tariffs.

These more internationally exposed sector’s supply chain costs are heavily exposed to tariffs, cutting down profit margins. Final demand suffers from all-in higher tariff prices.

The Health Care and Financial sectors have much lower international exposure, at 38% and 22% revenue exposure, respectively. Not surprisingly, those sector’s earnings benefitted the most, from the insulation of their mostly-domestic business models.

With seven S&P500 sectors suffering EPS declines y/y in Q2, and only 2 sectors suffering a decline in revenues in Q2, one can also infer: The negative trade war effects on profit margins are larger than they are on revenue growth.

If you are looking for a current historical analogy --showing you what you might do as an investor or trader in 2019-- the 2016 period is the best.

In 2016, the big problem for earnings growth was a collapse in crude oil prices (caused by another top-down government actor, the Saudis). An oil bear market boosted U.S. household income, but undermined corporate earnings, especially energy companies.

The consumer hung in there in 2016, and continued to shop and spend.

The timing of the profit downturn was somewhat similar in 2016. It took place in the face of an American economy that continued to grow, albeit slowly.

But the one-two punch of cheap oil and a strong U.S. dollar were powerful enough forces to drown out steady U.S. earnings growth.

What about stocks?

2015 returned -0.73%. 2016 was a volatile year for the S&P500. It marked a +9.54% total return.

As I write, the S&P500 trades at 2,873 on August 6th, 2019. One year ago, it traded at 2,853. That looks and sounds like the flat 2015 return.

Markets are forward looking, though. There is more hope for a bounce, if the market sees an end to the trade war, than you may think.

The date of the next Presidential election, in November 2020, is one Rubicon to think harder about. The stock market may price in an end to the trade war, believing in an end that comes only then.

That would put a 12-month forward bullish (trade war’s end with regime change) cyclical rotation at roughly around November 2019.

Zacks August Sector/Industry/Company Telescope

The month of August is here.

The latest Q2 GDP report showed us. The consumer is solid. But business fixed investment is lackluster. I think the Sector ranks this month speak to that.  

We have a top sector in Health Care, with strong demographics. Though Health Care sector stock returns lagged this year, due to concern about regime change after the 2020 Presidential election.  

The next two top sectors are Consumer Staples and Discretionary, in that order. It seems to be. Sales at retail held up well.

The usual defensive sectors, Communication Services and Utilities, are at the bottom. 

Taken together, the picture is one of modest cyclical upside in EPS.

(1) Health Care is now the all-around leading Very Attractive sector. The leaders are both Medical Care and Medical Products. Drugs are good too.

Zacks #1 Rank (STRONG BUY) Stock— DaVita (DVA Quick QuoteDVA - Free Report)

DaVita Inc. is the parent of DaVita Kidney Care and HealthCare Partners.

• DaVita Kidney Care is a provider of kidney care, delivering dialysis services for chronic kidney failure and end stage renal disease primarily in the United States.
• HealthCare Partners manages and operates medical groups and affiliated physician networks primarily in California, Nevada, New Mexico, Florida, Colorado and Washington.

DaVita Inc., formerly known as DaVita HealthCare Partners Inc., is headquartered in Denver, Colorado.

(2) Consumer Staples is a Very Attractive sector in August. The leaders are Food/Drug Retail, Agribusiness, and Food.

Zacks #1 Rank (STRONG BUY) Stock—Hershey (HSY Quick QuoteHSY - Free Report)

The Hershey Company is a global confectionery leader known for bringing goodness to the world through its chocolate, sweets, mints and other great-tasting snacks.

The company has more than 80 brands around the world, including such iconic brand names as Hershey's, Reese's, Hershey's Kisses, Jolly Rancher, Ice Breakers and Brookside.

(3) Consumer Discretionary is a Market Weight sector. The best industries are Non-Food Retail/Wholesale, Apparel, and Publishing.

Zacks #2 Rank (BUY) Stock— Best Buy (BBY Quick QuoteBBY - Free Report)

Best Buy is a leading retailer of technology products, services and solutions.

The company offers expert service at an unbeatable price to consumers, small business owners, and educators who visit stores, engage with Geek Squad Agents, use BestBuy.com, or the Best Buy app.

Most of the U.S. population lives within 15 minutes of a Best Buy store. The company also has operations in Canada and Mexico, where Best Buy has a physical and online presence.

(4) Energy is a Market Weight. But there are very attractive industries here. Look at Oil & Gas Pipelines and Oil & Gas Integrated.

(5) Financials are a Market Weight. The industry leaders are Finance-Consumer, Real Estate, and Insurance.

(6) Industrials are down to Unattractive.  The 2 industries worth looking at here are Aerospace & Defense and Conglomerates. Airlines are bad either.

(7) Info Tech is Unattractive. The trade war is playing an obvious role here. There is a leading industry: Computer-Software Services. The gaming industry and “Fortnite” are helping out. Chips are at Neutral.

(8) Materials stand at Unattractive. There is a winner in Metals-Non-Ferrous to point out. Steel is good too. Stay away from Paper and Chemicals.

(9) Communication Services is Very Unattractive. There is no good option.

(10) Utilities are also Very Unattractive. Again, there is no good option