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Looking for Earnings Surprise? 6 Sector ETFs to Play

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During an earning season, every investor looks for stocks that can beat market expectation. This is because investors always try to tap stocks that are of high quality in nature. Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations.

No matter how big the earnings growth is, a positive earnings surprise is the thing that drives the stock up. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.

Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report sequential earnings decline in Q1. In such cases, growth rates are misleading while judging the true health of a company.

On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.

Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.

Against this backdrop, below we highlight a few sectors and related ETFs that have offered best median surprise so far this reporting season.

Consumer Discretionary – Median Surprise 27.21%

About 8.63% of the companies that have reported so far have come up with a beat ratio of 85%.  The sector has registered year-over-year EPS growth of 2.95%.

The U.S. economy seems to be strongly rebounding from the coronavirus-led slowdown. Several factors like the reopening of the U.S. economy, accelerated coronavirus vaccine rollout, cheap energy prices, easy money policies and solid fiscal support are raising consumer optimism. Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report)  has a Zacks Rank #2 (Buy) (read: ETFs to Gain on Strong U.S. Consumer Sentiment in April).

Retail and Wholesale – Median Surprise 25.90%

About 9% of the companies reported so far have come up with a beat ratio of 77.78%. The sector has recorded year-over-year EPS growth of 4.93%.

This sector has been in solid shape in the past few months. In March 2021, U.S. retail sales recorded the best gains in 10 months. Sales surged 9.8% sequentially, easily beating market forecasts of a 5.9% increase. The $1,400 checks sent to consumers from mid-March and improvement in the weather after winter storms in Texas and some other parts of the South region in February led to this gain. SPDR S&P Retail ETF (XRT - Free Report) has a Zacks Rank #2 (Buy) (read: March Retail Sales Sparkles: Industry ETFs & Stocks to Win).

Auto, Tires and Trucks – Median Surprise 23.97%

About 6.67% of the companies reported so far have come up with a beat ratio of 71.43%. The sector has recorded year-over-year EPS decline of 3.35%.

The U.S. auto industry bounced back strongly in the first quarter of 2021 as car sales soared 11%  buoyed by the waning signs of COVID-19 crisis and concerns over potential vehicle shortages (caused by global chip crunch). Sales of electrified vehicles surged 81% in Q1 in the United States. Europe car sales also shot up 63% in March. First Trust NASDAQ Global Auto ETF (CARZ - Free Report) has a Zacks Rank #3 (Hold).

Construction – Median Surprise 23.64%

About 11.11% of the companies reported so far have a beat ratio of 100%. The sector recorded has year-over-year EPS growth of 14.04%.

President Biden’s $2.3-trillion infrastructure plan and solid home sales are the tailwinds for the construction sector. Invesco Dynamic Building & Construction ETF (PKB - Free Report) has a Zacks Rank #3.

Aerospace – Median Surprise 19.35%

About 7.89% of the companies reported so far have a beat ratio of 100%. The sector has logged year-over-year EPS growth of 10.39%.

The commercial aviation market has been recovering from the coronavirus-related slump while exposure to the defense sector always gives the Aerospace & Defensesector protection from the downside risks. iShares U.S. Aerospace & Defense ETF (ITA - Free Report) has a Zacks Rank #3.

Finance – Median Surprise 16.28%

About 22.22% of the companies reported so far have a beat ratio of 88.08%. The sector has registered year-over-year EPS growth of 6.91% so far.

A rising rate environment, though gradual, will lead to a favorable operating environment for financial stocks. Also, banking stocks offer value now. Activity levels in the equity underwriting, M&A and trading has been around record levels for the seasonally weak Q1, which more than compensated for the persistent sluggishness in lending demand and margin pressures. First Trust Financials AlphaDEX ETF (FXO - Free Report) has a Zacks Rank #2.

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