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Sector ETFs, Stocks to Bet on Q2 Solid Earnings Expectation

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The Q2 earnings season is set to kick off this week with the banking sector slated to report numbers. Total S&P 500 earnings are expected to be up 62.2% from the same period last year on 18.2% higher revenues. The earnings projection reflects an improvement from 50.6% growth expected at the start of Q2 and follows 49.3% earnings growth in Q1.

Most of the strength is due to easy comparisons to last year’s pandemic-hit period. Notably, last year’s June quarter represented the peak of the pandemic’s earnings impact when S&P 500 earnings dropped 32.2% from the year-earlier period. Four of the 16 Zacks quarters — consumer discretionary, autos, energy & transportation — actually lost money in Q2 2020. In the aggregate, the Zacks consumer discretionary sector lost $251 million in Q2 2020, while the auto, energy and transportation sectors lost $1.2 billion, $9.6 billion and $5.3 billion, respectively. These sectors are now projected to report positive earnings (read: 3 Sector ETFs That Have More Room for Growth in Q3).

The other 12 sectors are expected to witness positive year-over-year earnings growth. Basic material is expected to be the biggest contributor to S&P 500 earnings with 246% growth. This was followed by aerospace (160.3% earnings growth), finance (92.8%), and industrial products (63.6%). In fact, 9 of the 16 Zacks sectors are expected to earn more in Q2 than they did in second-quarter 2019, including Technology (up 31.8%), Basic Materials (77.4%), Medical (20.3%), Retail (25.6%) and Construction (58.9%).

Given this, we have highlighted one ETF and one stock from the four sectors that could make great plays as the earnings season unfolds. These ETFs and stocks have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

For stocks, we have added the extra criterion of a positive Earnings ESP. The combination of a Zacks Rank #3 or better and a positive ESP increases the odds of an earnings beat by 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Materials

Being cyclical in nature, basic material companies are expected to gain from a speedy economic recovery backed by rapid vaccination and expanded stimulus. This will lead to higher demand for several types of products and services in the economy.

Materials Select Sector SPDR (XLB - Free Report) : This is the most popular material ETF that follows the Materials Select Sector Index. It manages about $9.1 billion in its asset base and trades in volumes as heavy as around 7 million shares. In total, the fund holds about 28 securities in its basket with heavy concentration on the top firm and charges 12 bps in fees per year from investors. In terms of industrial exposure, chemicals dominates the portfolio with 68% share while metals & mining and containers & packaging round off the top three positions. The product has a Zacks ETF Rank #1 with a Medium risk outlook (read:4 Top-Ranked Sector ETFs to Buy at Cheap & Sell at High).

Dow Inc. (DOW - Free Report) : This material science company provides a world-class portfolio of advanced, sustainable and leading-edge products. The stock has a Zacks Rank #2 and an Earnings ESP of +3.50%. The stock has seen positive earnings estimate revision of 12 cents for the to-be-reported quarter over the past 30 days and delivered a four-quarter earnings surprise of 26.5%, on average. Its earnings are estimated to grow to $2.34 per share from a loss of 26 cents reported in the year-ago period. The company is slated to release earnings results on Jul 22 before the opening bell.

Aerospace

The aerospace and defense sector is benefiting from the recovering commercial aviation market. Additionally, defense spending is a key part of the country’s budget and is likely to remain unperturbed by the economic situation.

iShares U.S. Aerospace & Defense ETF (ITA - Free Report) : This fund provides exposure to U.S. companies that manufacture commercial and military aircraft, and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It holds 34 stocks in its basket with AUM of $2.9 billion and an expense ratio of 0.42%. The product trades in an average daily volume of around 161,000 shares. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Moog Inc (MOG.A - Free Report) : It is a designer, manufacturer and integrator of precision motion control products and solutions. The stock has a Zacks Rank #2 and an Earnings ESP of +2.11%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 3 cents over the past 30 days and has 28% expected earnings growth. Additionally, the company delivered a four-quarter earnings surprise of 49.8%, on average, and is scheduled to report earnings on Jul 23.

Finance

The finance sector is benefiting from the improving economic fundamentals, which has raised the demand for loans and all types of financial services.

SPDR S&P Regional Banking ETF (KRE): This is one of the largest and most-popular ETFs in the banking space with AUM of $4.6 billion and an average daily volume of 8.3 million shares. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 130 securities in its basket, the fund is widely spread out across each security with an equal-weight approach of around 2%. The fund carries a Zacks ETF Rank #2 with a High risk outlook (read: 5 Top Performing Banking ETFs in 1H21).

Bank of Nova Scotia The (BNS - Free Report) : It is one of North America's premier financial institutions and Canada's most international bank. The stock has a Zacks Rank #2 and an Earnings ESP of +2.77%. The stock saw solid earnings estimate revision of 14 cents for the to-be-reported quarter over the past month and represents year-over-year growth of 117.3%. The company’s trailing four-quarter positive earnings surprise is 10.41% on average. The company is slated to release earnings results on Aug 24 before the opening bell.

Industrials

The optimism surrounding the gradual reopening of global economies and increasing demand is painting a rosy picture for the cyclical sectors like industrials.

Industrial Select Sector SPDR (XLI - Free Report) : This is the most-popular ETF in the industrial space with AUM of $19.6 billion and an average daily volume of around 12.1 million shares. The fund follows the Industrial Select Sector Index, holding 74 stocks in its basket. It is well spread out across sectors with machinery, aerospace & defense, industrial conglomerates, and road & rail making up for a double-digit share each. This ETF charges 12 bps in fees per year and has a Zacks ETF Rank #1 (read: ETF Strategies to Cheer the Dovish Fed Minutes).

Pentair plc (PNR - Free Report) : It delivers a comprehensive range of smart, sustainable water solutions to homes, business and industry globally. The stock has a Zacks Rank #1 and an Earnings ESP of +1.91%. The Zacks Consensus Estimate for the to-be-reported quarter has been revised upward by 4 cents over the past 30 days and has expected 32.2% earnings growth. Additionally, the company delivered a positive four-quarter earnings surprise of 25.4%, on average, and is scheduled to report earnings on Jul 22.