ETF Trends
ETF Trends

Earnings season is here and this week, investors will be treated to an avalanche of reports from the financial services sector, the S&P 500’s second-largest sector weight.

S&P 500 profits forecast to decline for the first time since 2012 but financials are projected to deliver the best earnings growth in the S&P 500 this year and the sector is one of just three forecast to show double-digit profit growth. Investors should also be keeping watchful eyes on companies that have recently delivered big earnings beats.

“According to Jaseem Hasib, Vice President of S&P Capital IQ’s Global Market Intelligence, over the past 10 years, when companies have a big beat in one quarter they come back and beat again in the next quarter an above-average 75% of the time and miss only 19% of the time (in line results occur the remainder of the time). Meanwhile, those with a big miss beat only half the time in the next quarter. S&P 500 companies are well covered by Wall Street analysts, with the median company having 19 estimates, nearly double that of a mid-cap S&P 400 index constituent. Yet, Hasib noted that unexpectedly the beat rate for those S&P 500 companies with major positive surprises was greater than the 71% rate for 400 representatives,” said S&P Capital IQ in a new research note.

The earnings-weighted WisdomTree Earnings 500 Fund (NYSEArca: EPS) is one exchange traded fund investors can use to prepare for possible upside surprises this earnings season. EPS tries to reflect the performance of the WisdomTree Earnings 500 Index, which is a fundamentally weighted index that tracks earnings-generating, large-cap U.S. stocks. [An ETF for Companies With Strong Earnings]

As an earnings-weighted ETF, EPS differs from traditional cap-weighted S&P 500 ETFs at the sector level. For example, financials are the largest sector weight in EPS while technology is the biggest sector allocation in cap-weighted S&P 500 funds. Consumer discretionary is the third-largest sector weight in EPS at 11.5%, but that group is the fourth-largest sector weight in cap-weighted S&P 500 ETFs with an allocation of almost 13%. [Not All S&P 500 ETFs are the Same]

“S&P 500 companies beat Capital IQ quarterly consensus forecasts 66% of the time since 2005, a reminder that Wall Street analysts tend to be more cautious with their forecasts than warranted. Yet we found that this conservatism has been even more prevalent for those companies that beat expectations by more than 10% (big beat) and less prevalent for those companies that missed by more than 10% (big miss) in the prior quarter,” notes S&P Capital IQ.

Financials, healthcare and consumer discretionary are the three sectors expected to post double-digit earnings growth this year. Those sectors combine for nearly 43% of EPS’s weight. S&P Capital IQ has an overweight rating on the $136.1 million ETF.

WisdomTree Earnings 500 Fund