Investors have shifted their focus toward the second-quarter earnings season, with some of the major banks expected to report results next week. Some of the key sectors expected to contribute to second-quarter earnings growth are energy, aerospace, finance, technology, construction and industrial products.
Better-than-expected earnings performances should lead to a rally in the price of stocks from these sectors. This is why we should keep an eye on mutual funds from sectors that are likely to make the most of the second-quarter earnings season.
Prospects for Q2 Earnings Upbeat
According to estimates, total second-quarter earnings for the S&P 500 index are expected to be up +5.7% from the same period last year on +4.6% higher revenues. If we move beyond Q2, total earnings for the S&P 500 cohort are anticipated to increase 6.3% on 4.5% higher revenues in Q3 and gain 9.8% on 5.3% higher revenues in Q4.
For the entire year, total earnings for the index are expected to be up 7.4% on 4.2% higher revenues. This will be way more than 1.1% earnings growth on 2.1% higher revenues recorded last year. Earnings for the S&P 500 index are expected to be up 11.3% in 2018 and 9.2% in 2019. (Read More: Start of the Q2 Earnings Season).
Who Could be the Major Winners of Q2?
From the 16 major S&P 500 sectors, earnings are expected to be upbeat for 10. Out of the major contributors to the overall earnings growth in the second quarter, earnings for the energy sector are expected to increase 250%. Although negative sentiments stemmed from the decline in oil prices during the May-June period, strong earnings growth should be a breather for investors. The energy sector is expected to earn $9.4 billion this quarter, up from a gain of $2.7 billion the year-earlier period.
Some other key sectors projected to witness double-digit earnings growth in the second quarter are aerospace (48.8%), construction (15.7%) and industrial products (11.8%). Encouraging ISM Manufacturing data released last month is expected to have a positive impact on construction and industrial sectors.
The two largest sectors in the S&P 500 Index, finance and technology, are also anticipated to put up a stellar show. Despite a flattening yield curve, financials will post strong revenue growth from capital markets since investment banking got a boost in advisory fees for IPOs, while M&A saw continuous growth. To top it, encouraging annual “stress test” results, the Fed sticking to a 25-basis point (bps) rate hike amid inflation worries and the Trump administration expected to push for lesser banking regulations are some of the positives that bode well for the financial sector. For Finance, earnings are expected to be up 5.8% (read more: Have Bank Stocks Finally Turned Around?).
The technology sector is expected to post 10.1% earnings growth. The semiconductor industry’s earnings growth is estimated to drive the maximum increase in technology sector earnings.While being less sensitive to both taxes and interest rates bode well for tech companies, a one-time tax on trillions of dollars held overseas will provide a necessary windfall for those companies that have hoarded money outside the country (read more: Silicon Valley Is Richer Than Ever: 4 Hot Tech Picks).
Buy These 6 Top Performing Mutual Funds
Here, we have selected one mutual fund from each of the six major sectors which are expected to be the major contributor to second quarter earnings growth. Moreover, these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds have encouraging one-year returns and minimum initial investment is within $5000. Also, each of these funds has a low expense ratio.
Dreyfus Natural Resources Fund A (DNLAX - Free Report) invests the lion’s share of its assets in stocks issued by companies engaged in natural resources and natural resources related sectors. The fund may invest in non-U.S. securities, including emerging markets securities. DNLAX have strong exposure in energy sector.
The fund has one-year return of 7%, and an expense ratio of 1.34% as compared with the category average of 1.42%.
Fidelity Select Defense & Aerospace Portfolio (FSDAX - Free Report) invests a large portion of its assets in securities of companies principally engaged in the research, manufacture, or sale of products or services related to the defense or aerospace industries.
The fund has one-year return of 26.5%, and an expense ratio of 0.79% as compared with the category average of 1.20%.
Fidelity Select Financial Services Portfolio (FIDSX - Free Report) invests the majority of its assets in common stocks of companies involved in offering financial services to industry and consumers. FIDSX invests in both U.S. and non-U.S. companies.
The fund has one-year return of 27.8%, and an expense ratio of 0.76% as compared with the category average of 1.39%.
Putnam Global Technology A (PGTAX - Free Report) invests a huge portion of its net assets in securities of companies in technology industries. PGTAX generally invests in common stocks of large- and mid-cap technology companies, which are expected to have strong investment potential. This non-diversified fund seeks growth of capital.
The fund has one-year return of 41.6%, and an expense ratio of 1.28% as compared with the category average of 1.45%.
Schwab Global Real Estate (SWASX - Free Report) invests a bulk of its assets in common stocks of companies which are related to the real estate sector. SWASX may also invest in real estate investment trusts. The fund may also invest in derivative instruments like options, swaps and futures which are based to the real estate industry.
The fund has one-year return of 2.7%, and an expense ratio of 1.05% as compared with the category average of 1.38%.
Fidelity Select Industrials (FCYIX - Free Report) seeks capital growth by investing mainly in equity securities. FCYIX invests the bulk portion of its assets in securities of companies involved in manufacture, development, sales and distribution of industrial products and equipments. The fund invests in both U.S. and non-U.S. companies.
The fund has one-year return of 14.4%, and an expense ratio of 0.77% as compared with the category average of 1.20%.
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