It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high-quality in nature.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet consensus estimates. After all, even a 20% earnings rise (though apparently looks good) doesn’t tell you if the growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is usually weak and Q4 strong, then it is likely to report a sequential earnings decline. 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.
So, it makes sense to look at the beat ratios of the S&P 500 companies in the Q2 reporting season. As per the
Earnings Trends issued on Aug 24, 2022, as much as 95% of the S&P 500 members have already reported results. Of these, 77.1% beat on earnings in Q2 of 2022 while 68.5% surpassed revenue estimates, translating into a blended beat ratio of 57.7%.
Against this backdrop, investors must be interested in finding out the sectors that have solid blended beat ratios so far this season. Below we highlight those so that investors can decide on for their future plays.
Basic Materials – iShares U.S. Basic Materials ETF ( IYM Quick Quote IYM - Free Report)
Companies of the sector delivered a blended beat ratio of 70.6%. As many as 82.4% companies beat on earnings while 70.6% outperformed on revenues. This should make IYM a winning proposition. Upbeat activities in the infrastructure and industrials sectors made demand for materials high. Orders of Chemical Products remained strong.
Utilities – Utilities Select Sector SPDR ETF ( XLU Quick Quote XLU - Free Report)
All companies have reported already and produced a blended beat ratio of 70.4%. Of this, earnings beat ratio is 74.1% while revenue beat ratio is 96.3%. The sector is non-cyclical in nature. As recessionary fears took an upper hand, demand for this safe sector gained precedence.
Technology – Technology Select Sector SPDR ETF ( XLK Quick Quote XLK - Free Report)
As many as 90.8% companies of the sector have already reported and registered a blended beat ratio of 71%. There were 85.5% companies beating on earnings and 76.8% companies surpassing revenue estimates. The sector has been a true winner amid COVID-19 thanks to the rising work-and-learn-from-home trend. Plus, the demand for the sector is ever-increasing.
Transportation – SPDR S&P Transportation ETF ( XTN Quick Quote XTN - Free Report)
All companies have reported already and produced a blended beat ratio of 66.7%.Of this, earnings beat ratio is 73.7% while revenue beat ratio is 93.3%.As economic activities gained momentum, the sector fared better.
Auto – First Trust SNetwork Future Vehicles & Technology ETF ( CARZ Quick Quote CARZ - Free Report)
All companies of the sector have already reported and registered a blended beat ratio of 62.5%. There were 87.5% companies beating on earnings and 62.5% companies surpassing revenue estimates. Sales of Motor Vehicle & Parts Dealers gained 0.8% sequentially in June but remained flat year over year.Moreover, the price inflation of new cars has been palpable.
Consumer Staples – Consumer Staples Select Sector SPDR ETF ( XLP Quick Quote XLP - Free Report)
About 90.6% companies of the sector delivered a blended beat ratio of 62.1%. As many as 79.3% companies beat on earnings while 75.9% outperformed on revenues. The sector is non-cyclical in nature and may fare better in a recessionary environment.