Fourth-quarter earnings season kicks off this week with an avalanche of updates from the financial services sector. Dow component J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) get the earnings ball rolling today.
With the arrival of another earnings season come an opportunity for investors to get tactical with sector exchange traded funds and tactical might be the right way to go.
“When companies in the S&P 500 report actual earnings above estimates during an earnings season, the overall earnings growth rate for the index increases because the higher actual EPS numbers replace the lower estimated EPS numbers in the calculation of the growth rate. For example, if a company is projected to report EPS of $1.05 compared to year-ago EPS of $1.00, the company is projected to report earnings growth of 5%. If the company reports actual EPS of $1.10 (a $0.05 upside earnings surprise compared to the estimate), the actual earnings growth for the company for the quarter is now 10%, five percentage points above the estimate growth rate (10% – 5% = 5%),” according to FactSet.
Broadly speaking, the financial services sector is not expected to show stellar fourth-quarter earnings growth, but ETFs such as the Financial Select Sector SPDR (NYSEArca: XLF) merit attention because the sector has the highest percentage of Sharp estimates above mean fourth-quarter EPS forecasts. [Lackluster Earnings Could Hamper Bank ETFs]
“At the sector level, the Financials sector currently has the highest number (14) and the highest percentage (16%) of companies with a Sharp estimate above the mean EPS estimate for the fourth quarter. At the industry level, 8 of these 14 companies are in the Insurance industry,” notes FactSet.
Expectations for some good news out of the insurance industry comes at a time when some analysts and investors are concerned about the effects of a strong dollar on ETFs such as the SPDR KBW Insurance ETF (NYSEArca: KIE) and the iShares US Insurance ETF (NYSEArca: IAK). [Strong Dollar Pressures Insurance ETFs]
Not surprisingly, the energy sector, the worst performer in the S&P 500 last year, is expected to be an earnings season disappointment.
“The Energy sector currently has the highest number (14) and the highest percentage (33%) of companies with a Sharp estimate below the mean EPS estimate for the third quarter. At the sub-industry level, 11 of these 14 companies are in the Oil & Gas Exploration & Production sub-industry,” notes FactSet.
Several of those 14 companies dwell in the Energy Select Sector SPDR (NYSEArca: XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP), ETFs that lost 8.7% and 29.4%, respectively last year.
Even with the energy sector’s struggles, investors poured $2.1 billion into XLE last month, a sign energy’s valuations (the lowest in the S&P 500) are compelling investors to nibble at the group.
Energy Select Sector SPDR
