As the markets digest fourth quarter earnings results, U.S. markets are expected to fall further into an earnings recession, with S&P 500 companies likely to show decline in profits for the third consecutive quarter. Nevertheless, there some sectors and related exchange traded funds that may pull through.
Profits are expected to decline by 7.2% in the fourth quarter on a share-weighted basis and revenues are projected to drop by 3.1%, which would represent the worst earnings season since the third quarter of 2009, Bloomberg reports.
Pressuring the U.S. equities market, the continued decline in crude oil prices, which have recently dipped to 12-year lows, is expected to cause a 73% falloff in earnings for the oil and gas sector. Moreover, the strengthening U.S. dollar has weighed on exporters to, according to Sam Stovall, U.S. equity strategist for S&P Capital IQ.
According to Bloomberg data, the worst sector fourth-quarter profits will come out of energy, followed by a 25% profit decrease in materials, 4.8% dip in information technology, 4.8% fall in financials, 4.3% drop industrials and a 2.9% slump in consumer staples.
BNP Paribas strategists warn of potential disappointments in the financial sector due to high market volatility and sharp slowdown in capital markets activity. Stovall is also concerned about the sector because of potential ripple affects from U.S. energy on banks.
“Financials face a kitchen-sink quarter, they will probably try to write down whatever they can,” Stovall added.
ETF investors who are worried about any nasty surprises in the financial earning season can also hedge the sector through various levels of leveraged inverse strategies. For instance, the ProShares Short Financials ETF (NYSEArca: SEF) takes the single inverse or -100% of financial stocks, while the ProShares UltraShort Financials (NYSEArca: SKF) takes a leveraged -200% of financials. Additionally, for -3x or -300% performance, there are the ProShares UltraPro Short Financials (NYSEArca: FINZ) and Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ).
On the other hand, the telecom sector could reveal the largest positive profit growth in the past quarter, followed by health care, consumer discretionary and utilities.
ETF investors can also target these areas with broad sector ETF plays. For instance, the iShares U.S. Telecommunications ETF (NYSEArca: IYZ), Vanguard Telecommunication Services ETF (NYSEArca: VOX) and Fidelity MSCI Telecommunication Services Index ETF (NYSEArca: FCOM) provide exposure to the the telecom space.
The Health Care Select Sector SPDR (NYSEArca: XLV), iShares U.S. Healthcare ETF (NYSEArca: IYH), Vanguard Health Care ETF (NYSEArca: VHT) and Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC) provide access to the health care sector.
Investors can look at broad discretionary plays through the iShares US Consumer Services ETF (NYSEArca: IYC), Vanguard Consumer Discretionary ETF (NYSEArca: VCR) and Consumer Discretionary Select Sector SPDR (NYSEArca: XLY).
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.