Fourth-quarter earnings season kicks-off Thursday when former Dow component Alcoa (NYSE: AA) delivers results after the close of U.S. markets.
While the fourth-quarter reports and guidance offered by companies have the potential to be exciting, investors may not want to hold their respective breaths for a lot of good news because of 100 companies that have provided a glimpse into their upcoming reports, 80 have delivered negative news.
“This produces a negative-to-positive ratio of 8.0, higher than the 15-year average, offering an inauspicious glimpse of the earnings reporting period to come. Specifically, the S&P 500 is seen growing EPS by 5.7% in Q4 2013 over Q4 2012, on par with Q3 2013 growth,” said S&P Capital IQ Chief Equity Strategist Sam Stovall in a note.
Of the 10 S&P 500 sectors, only energy and utilities are expected to report year-over-year profit declines while technology, telecom and utilities are expected to report top-line shrinkage, according to Stovall. Stung by rising Treasury yields and investors’ thirst for higher beta fare, utilities exchange traded funds were laggards last year even as investors continued clamoring for dividends. The 13% gain posted by the Utilities Select Sector SPDR (NYSEArca: XLU) last year was not even half what the S&P 500 delivered. [Low Expectations for Utilities ETFs]
Investors looking for strong seasonal plays as Q4 earnings start rolling in can turn to consumer discretionary ETFs. “We expect relatively healthy earnings growth in a seasonally strong fourth quarter for the Consumer Discretionary sector, coming from sub-industries in media and entertainment, automotive, housing, retail and leisure/gaming. We expect a swath of constituent Discretionary companies to benefit in Q4 from spending associated with the holiday season,” said Stovall.
The media and entertainment sub-industry is coming off a stellar run in 2013, one that was strong enough to make the PowerShares Dynamic Media Portfolio (NYSEArca: PBS) the top-performing discretionary ETF. [Media Fund Leads Discretionary ETFs]
More direct plays on the holiday spending theme include the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY). For its part, XLY is heavily allocated to media names with a 29.5% weight, but high-flying Internet stocks such as Amazon (NasdaqGM: AMZN) and Priceline (NasdaqGM: PCLN) will also have their say in how the ETF acts this earnings season. Amazon and Priceline combine for 10% of XLY’s weight.
Industrial ETFs, a group of funds that have been receiving ample attention and praise in recent weeks, are shaping as strong earnings plays as well.
“We think that the overall sector will post mid-single-digit sales gains, along with modest margin improvement. We see most of the expected sales growth being driven by slightly more favorable economic conditions in both developed and emerging markets. We also expect margins to be aided by the leverage related to top line growth, cost cutting, and benefits of restructuring programs put in place over the past few years,” said Stovall. “We continue to see the most favorable Q4 results taking place in such sub-industries as Building Products, Airlines and Commercial Aerospace.”
The industrial sector was the best performer last year of the sectors represented in the Dow Jones Industrial Average with Boeing (NYSEArca: BA), often a large holding in many major industrial ETFs, contributing the largest points gain to the Dow. In fact, the top three contributors to the Dow’s 2013 upside were industrial stocks — Boeing, 3M (NYSE: MMM) and United Technologies (NYSE: UTX). [Dow Jones Industrial Average Year in Review]
The Industrial Select Sector SPDR (NYSEArca: XLI) was the third-best of the nine sector SPDR ETFs in 2013 with a gain of 40.5% and is now the third-largest U.S. sector ETF by assets.
S&P 500 Year-Over-Year Operating EPS Growth 2013
Chart Courtesy: S&P Capital IQ