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3 Sectors Areas to Invest in Ahead of Q3 Earnings

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Analyzing the third-quarter job market data is undoubtedly the best strategy for investors looking to play the upcoming earnings season. September data by the Department of Labor showed that from mid-March through late August, 59.3 million Americans filed for unemployment insurance.

A majority of these claims were made in July and August, with 13.3 million around late August. Though this was lower than the peak hit in mid-May of 25 million claims, the figure exceeded majority of market watchers’ initial projection.

Further, the Fed’s economic outlook released on Sep16 (that signaled at interest rates staying near zero through 2023) along with the grim pandemic scenario in Europe played a crucial role in dragging market sentiments down.

The Curveball

Even amid the ongoing volatility, the labor market scenario improved in the last month of the third quarter. Per the Bureau of Labor Statistics report released on Oct 2, the unemployment rate declined by 0.5 percentage points from August to 7.9%, and the number of unemployed people fell by 1.0 million to 12.6 million in September. In fact, September’s rate is the lowest in the past six months.

We believe this improvement can be primarily attributed to a significant uptick in corporate profits through the third quarter on lifting of restrictions in many regions of the nation. Going by a Wall Street Journal report of Oct 12, in the third quarter, profits of large S&P 500 companies are projected to drop of 20% year over year. However, this is an improvement from the projection of a 25% decline issued at the end of the second quarter.

Hit Sectors Before Q3 Releases

Apart from the different arms of healthcare that are providing support amid the pandemic like therapeutic and vaccine makers, diagnostic testing companies as well as critical care support providers, there were notable job gains in  leisure and hospitality, retail, social assistance and in professional and business services through the last months of the third quarter. Technology companies have also boosted investor confidence with a consistent rally through the third quarter.

3 Sectors to Bet on Now

Already a lot has been said on the growing prosperity of the digital health sector over the past few months for contactless services. Despite the U.S. government’s measures to make both telemedicine and remote patient monitoring mainstream over the past few years, primarily to minimize healthcare cost and increase access of care, the sector struggled to receive mass acceptance.

Nevertheless, post the COVID-19 outbreak, the situation has changed drastically. We believe, even when normalcy resumes, digital health stocks will keep gaining ground on the shift in consumer spending toward contactless services. Going by a Nielsen investigation report, consumer spending pattern is already more ‘proactive health-minded buying’ with interest growing in products that support overall health and wellness.

With respect to this, adding Allscripts Healthcare (MDRX - Free Report) to one’s portfolio seems prudent as the company is expected to report solid third-quarter sales. The stock currently carries a Zacks Rank #2 (Buy).

Consumer Staples stocks are also in focus in the current scenario. Consumers are hoarding toilet papers, sanitizers, face masks, other personal hygiene products and basic packaged food and beverages despite financial constraints. This is boosting consumer staples stocks like Reckitt Benckiser Group plc (RBGLY - Free Report) and Procter & Gamble Co. (PG - Free Report) , both of which carry a Zacks Rank #2.

With consumers limiting their outdoor exposure, another thing that has changed from the basics is the concept of education. Schools, universities as well as other learning institutes have been shut for indefinite periods. This has led to the development of the learn-from-home or e-learning concept. While e-learning can never substitute classroom teaching, many economists believe this virtual delivery of education will not fade even after the virus dies out.

Here, we suggest investors to snap up Zoom Video Communications, Inc. (ZM - Free Report) , which sports a Zacks Rank of 1 (Strong Buy). The stock also has stellar growth estimates, not only for the third quarter but also for the quarters ahead. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wrapping Up

Many of the industry watchers however are apprehensive about a significant rebound in business growth in the third quarter as there are high chances that certain aspects of customer behavior have permanently changed over the past few months.

Further, the Bureau of Labor Statistics recently noted that government employment declined over this period hit by deep budget cuts. Meanwhile, energy stocks’ bloodbath have continued in the third quarter as well, primarily on fading global demand from the aviation industry.

According to a Livemint report of Oct 12, “Energy stocks have been by far the weakest performers in the S&P 500 this year, off 49%. Exxon Mobil (XOM - Free Report) , which was recently ejected from the Dow Jones Industrial Average, warned earlier this month that it remains under financial pressure and unveiled job cuts in its European operations.” Billionaire Carl Icahn, in the meanwhile, remained optimistic about this battered sector although he does not deny any third-quarter debacle.

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