The second-quarter earnings season has hit the market with sky-high stock prices and extremely upbeat expectations. Estimates for the second-quarter earnings have risen steadily for the past six months (
per a CNBC article), from the expected 45% growth in January to 65% growth currently compared with the same period last year. It’s the strongest rate of growth since 2009 after the horrible spell of the Great Recession.
A 65% increase in earnings may sound massive, but it is happening only because of easy comparison. Along with many analysts we too believe that the COVID-19 crisis last year and the resultant lockdown have resulted in such expectations. An easy money policy and a fiscal stimulus pushed stocks to a sky-high level.
Investors should note that higher costs and pricing power have been a focal point in every analyst report this season due to steadily rising inflation. Supply chain shortages due to COVID-19 restrictions have been resulting into higher costs. Freight rates are rising. Commodities prices are soaring. Plus, there is labor shortage thanks to government stimulus that has been dolled out to consumers.
Why to Follow Revenue Growth This Reporting Cycle?
Sarat Sethi, managing partner and portfolio manager at DCLA and a CNBC contributor said, “what’s going to be important in this earnings season is who can have revenue growth and keep their operating margins,”
as quoted on CNBC.
Further, investors should note that sales are harder to be influenced in an income statement than earnings. A company can land up on decent earnings numbers by adopting cost-cutting or some other measures that do not speak for its core strength. But it is harder for a company to mold its revenue figure.
For Q2, total revenue is expected to grow 18.1% from the same period last year, per the
Earnings Trends issued on Jun 30, 2021. For Q2, five out of the Zacks classified 16 sectors of the S&P 500 will likely witness a revenue expansion of 30% or more.
Below, we highlight five sectors and their related ETFs that could be used to book some profits on revenue growth potential.
Consumer Discretionary – Consumer Discretionary Select Sector SPDR ETF ( XLY Quick Quote XLY - Free Report)
The sector is expected to expand 32.8% in Q2. The latest U.S. consumer confidence data came in impressive as the metric has surged to its highest level in June in about 16 months. The Conference Board's measure of consumer confidence index stands at 127.3, comparing favorably with an upwardly revised reading to 120.0 in May. This makes it important to bet on this Zacks Rank #2 (Buy) ETF (read:
ETFs to Shine Bright as US Consumer Confidence Soars in June). Autos – First Trust NASDAQ Global Auto ETF ( CARZ)
The sector is expected to record 34.8% revenue growth in Q2. The U.S. auto industry has been showing strength as the economy reopens and more people shift to private conveyance due to the COVID-19 pandemic. The demand for re-used cars have also been higher. Price of used cars and trucks rose 45.2% in June, while used cars and trucks registered 5.3% price gains in the month (read:
ETF & Stocks to Ride on Auto Industry Strength). Basic Materials – Materials Select Sector SPDR ETF ( XLB Quick Quote XLB - Free Report)
As manufacturing activities gain momentum, demand for materials is likely to pick up. Plus, the economy needs to stabilize itself from COVID blues and this demands stepped-up activities. In any case, metal and commodities prices are on a tear lately thanks to a relatively-subdued greenback and better demand-supply dynamics. All these bode well for material ETFs.
Energy – Energy Select Sector SPDR ETF ( XLE Quick Quote XLE - Free Report)
The energy sector has been positioned strongly currently thanks to higher pent-up demand. Oil prices have risen about 50% this year amid improving economic conditions globally. Though the outlook of the sector is uncertain given the deadlock in the OPEC+ deal, consumers with a strong stomach for risks can bet on this Zacks Rank #2 ETF.
Transportation – SPDR S&P Transportation ETF ( XTN Quick Quote XTN - Free Report)
The sector is expected to witness revenue growth of 46.5% in the ongoing reporting cycle. Inflation in transportation services was 10.4% in June. This explains the sector’s pricing power. The area was hit hard amid the lockdown. The economic reopening and the resultant improvement in supply chain as well as the slow uptick in the global tourism sector has made this relatively-beaten-down area a winner (read:
4 Sector ETFs That Are In High Momentum).