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Time for Transportation & Auto ETFs?

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The fourth-quarter earnings season has just started. The sentiments around the earnings season this time is pretty bearish, definitely for economic reasons. Barring the Energy sector’s strong contribution from the S&P 500 index, Q4 earnings for the rest of the index are expected to be down -11.7% on +3.1% higher revenues. The -11.7% decline in index earnings decline today is down from -2.9% on October 5th, per Zacks Earnings Trends issued on Jan 11, 2023.

Fourth-quarter earnings estimates have declined for 14 of the 16 Zacks sectors since the quarter got underway, with Transportation and Autos enjoying modest positive revisions. Auto earnings are now expected to log 44.8% growth over 20.3% increase in revenues. Meanwhile, transportation earnings are expected to register 35.5% growth over 10% revenue growth.

Auto Sales to Recover in 2023?

U.S. auto sales touched the Coronavirus bottom, down 8% to 13.9 million units in 2022 due to inventory crisis. Cox Automotive reported all-electric vehicle sales increased by 66% to more than 808,000 units last year in America. EVs represented about 5.8% of new vehicles sold in the United States, quoted on CNBC.

However, market participants expect the total car sales to recover in 2023. The China has reopened its economy. Supply-chain is improving and semiconductor shortages that devastated the auto sector have also been bucking the trend slowly. Tesla has cut its pricing twice since October. This may enable consumers to qualify for EV tax credits. This is plus for the industry.

Automakers have enjoyed unprecedented pricing power and profits per vehicle amid robust demand and low inventory levels in past years. Cox Automotive forecasts U.S. new vehicle sales will be 14.1 million in 2023, a slight increase from nearly 13.9 million last year, as quoted on CNBC. Plus, due to a dearth of available new vehicles and higher costs, consumers are not likely to change their vehicles sooner. This is expected to boost back-end service business, COX predicted.

Transportation Sector to Bounce Back?

The sector includes airlines, air freight & logistics, trucking, logistics, marine and railroads. The sector is a clear beneficiary of ebbing pandemic and reopening of global economies. Airlines should reap the return considerably. Supply chain is improving worldwide.  

The Global Supply Chain Pressure Index (GSCPI) peaked at 4.3 standard deviations above its historical mean at the end of 2021, after which it fell considerably, per New York Fed.  The GSCPI then reported five successive months of falls, reaching a low of 0.9 in September. However, the past three months have registered a pause in the return to the historical average.

ETFs in Focus

Against the above-mentioned backdrop, investors may want to keep a tab on these sectors and their related ETFs like iShares U.S. Transportation ETF (IYT - Free Report) , SPDR S&P Transportation ETF (XTN - Free Report) and First Trust SNetwork Future Vehicles & Technology ETF (CARZ - Free Report) . However, all three ETFs underperformed the S&P 500 (up 11.5%) so far in 2023. IYT and XTN have gained 8.2% and 4.2%, respectively this year while CARZ is up 10.5%.


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