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Will These Small-Cap Sector ETFs Sizzle on Earnings Strength?

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Small-cap stocks have been outperforming their bigger peers since late last year. Russell 2000 ETF (IWM - Free Report)  has gained 33.6% versus the 11.2% uptick in the S&P 500. Since small-cap stocks are more closely tied to the domestic economy, back-to-back news of coronavirus vaccines from the likes of Pfizer, Moderna and AstraZeneca bode well for the small-cap stocks. Notably, the United States administered its first shots of the COVID-19 vaccine on Dec 14.

Moreover, news of fiscal stimulus under the Biden presidency also aided the small-cap rally. Joe Biden’s “Rescue America” plan favors a COVID-19 relief package worth up to $1.9 trillion (read: Biden Favors $1.9T COVID Stimulus: ETFs to Win/Lose).

Since the dual tailwinds worked wonders for pint-sized stocks, investors must be interested in knowing how the earnings picture is evolving for the segment. That would give investors a clear idea in assessing the future rally in an otherwise still-undervalued small-cap segment.

Q4 Performance: S&P 600 Versus 500

Fourth-quarter earnings for the S&P 500 are expected to be up 0.4% year over year on 2.0% higher revenues. This increment will follow a 7.0% drop-off in Q3, a 32.2% decline in Q2 and a 12.8% slide in Q1.

Looking at Q4 as a whole for the small-cap index, total earnings are expected to be down 10.9% from the same period last year on 2.4% lower revenues. The decline in earnings will follow a 5.5% drop in Q3, a 62.1% plunge in Q2 and a 68.1% decline in Q1, per the Earnings Trends issued on Feb 3, 2021.

No wonder, the earnings underperformance has been prevalent for small-cap stocks for a long time. Still, the rate of decline appears to better if we look at the beginning of 2020. Against this backdrop, below we highlight a few small-cap sector ETFs that are promising a better earnings and revenue growth rate in the ongoing reporting season.

Construction — Invesco Dynamic Building & Construction ETF (PKB - Free Report)

This sector of the S&P 600 index is likely to record 39.8% earnings growth in Q4 on 12% higher revenues. The fund has advanced 3.6% this year.

Consumer Staples — Invesco S&P SmallCap Consumer Staples ETF (PSCC - Free Report)

The sector is likely to end the fourth quarter with a 25.4% increase in earnings and 5% revenue gains. The fund PSCC is up 11.4% this year.

Basic Materials — Invesco S&P SmallCap Materials ETF (PSCM - Free Report)

The sector is likely to end the fourth quarter with a 58.4% increase in earnings and 5.2% revenue gains. The fund PSCM is up 4.8% this year.

Technology— Invesco S&P SmallCap Information Technology ETF (PSCT)

Earnings are likely to be 20.5% higher while revenues may see a 2.9% uptick. The fund PSCU has gained 9.5% this year.

Utilities — Invesco S&P SmallCap Utilities & Communication Services ETF (PSCU - Free Report)

Earnings are likely to be 29.6% higher while revenues may see 17.6% gains. PSCU has advanced 9.2% this year.

Finance — Invesco S&P SmallCap Financials ETF (PSCF - Free Report)

Earnings are likely to be up 17.8% year over year on 3.4% higher revenues. The fund has tacked on 6.4% gains in the year-to-date frame.

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