The so-called earnings recession may have extended over the first quarter. Nevertheless, exchange traded fund investors may still find opportunities in some sectors that continue to grow.
Capital IQ aggregate first quarter 2016 S&P 500 earnings-per-share are estimated to be $26.37, or a 7.5% decline year-over-year, compared to a 4.2% decrease for Q4 2015, Sam Stovall, U.S. Equity Strategist for S&P Global Market Intelligence, said in a research note.
Moreover, the earnings dip over the first quarter represents the first time since 2009 that the S&P 500 experienced a year-over-year earnings decline in three consecutive quarters, adding to worries of an extended earnings recession U.S. equities.
Nevertheless, investors may still find opportunities in sector-specific ETFs, including the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), Vanguard Telecommunication Services ETF (NYSEArca: VOX) and Health Care Select Sector SPDR (NYSEArca: XLV).
Stovall estimates that only three of the 10 S&P sectors are expected to post positive earnings growth over the first three months, with consumer discretionary showing +11.4%, telecommunications +5.2% and healthcare +2.9%.
Strengthening macroeconomic indicators, rising consumer confidence and low interest rates on loans have supported the consumer discretionary sector, according to Stovall. Moreover, low gasoline prices also put more cash into consumers’ pockets.
[related_stories]S&P Global Market Intelligence believes the telecom sector is expanding on modest U.S. economic growth and a stimulative interest-rate environment – the ongoing low-yields help push investors to yield-generating assets like telecom.
The healthcare sector could report a lower earnings growth over Q1 2016 partly due to the robust 21.4% growth in Q1 2015 earnings. Moreover, the greater scrutiny on rising drug prices, especially in an election year, have caused many drug firms to moderate or eliminate price hikes. Nevertheless, the increase healthcare enrollment in the Affordable Care Act continues to support the industry.
On the other hand, the Energy Select Sector SPDR (NYSEArca: XLE), Materials Select Sector SPDR (NYSEArca: XLB), Industrial Select Sector SPDR (NYSEArca: XLI) and Technology Select Sector SPDR (NYSEArca: XLK) may struggle.
Stovall expects the energy sector could continue to weigh on the equities market. Energy companies are expected to show a -104.8% year-over-year earnings decline in the first quarter, followed by materials -18.8%, industrials -7.4% and information technology -5.9%.
The energy sector could deliver an operating EPS loss over Q1 for the first time this century. While crude oil prices plunged over the past year, energy producers still managed to eke out positive gains in prior quarters. Stovall attributes the worsening conditions in the energy space to the lower spread between Brent and WTI oil, which hurts refiners and companies with downstream operations, and belt-tightening from producers, which puts more pressure on oil services and drillers to clash costs.
The materials space is also suffering from depressed commodity prices, but not to the same extent as energy. For instance, chemical or fertilizer producers are experiencing lower earnings growth due to lower agricultural prices.
In the industrials space, sub-sectors related to oil & gas, metals & mining or agriculture could remain weak in a depressed commodities environment.
A stronger U.S. dollar has had a negative impact on the tech sector, notably on overseas sales. SP Dow Jones Indices calculated that in 2014, the technology sector saw 59% of revenue from international sources, the most of the 10 economic sectors, compared to 48% for the overall S&P 500.