Sector Watch: Tactical Investment Opportunities Around Q1 Earnings Season

Note: This article appears on the Strategist Channel

By Ron Saba

A key component of successful goals-based investing is to think opportunistically. Tactical investment strategies designed to capture upside returns and minimize downside risk are integral to investors’ ability to grow, protect and spend their wealth in pursuit of their unique goals.

With earnings season in full swing, it’s a natural time to assess the opportunities in the market. Although estimates for first quarter earnings are grim—S&P earnings are expected to be down 9% on a year-over-year basis—we believe investors may be too pessimistic. There are encouraging developments in a number of market sectors that, taken together, could result in revenue and earnings surprises to the upside in the first quarter and beyond.

Here’s a look at some key developments in two important market sectors:

Financial Services

While the overall market edged up 0.8% in the first quarter, financial services stocks were pummeled with a 5.6% loss—the worst performance of any S&P sector. Weak trading volume in the wake of spiking market volatility played a part in those results, as did the overall global economic slowdown and continued rock-bottom interest rates.

However, investors continue to view the sector too negatively. Yes, trading volume and investment banking were weak during the first three months of the year. But many core aspects of financial services companies’ businesses—such as consumer banking and lending—remain healthy. Last month, for example, Bank of America reported that net income in its consumer banking division rose 22% in the quarter. We already saw several large financial services firms beat first-quarter earnings expectations.