Market participants have only recently finished digesting marquee fourth-quarter earnings reports. But there is than a month left in Q1. So it’s an appropriate time to consider what could be in store when the next earnings season starts.
Among the exchange traded funds that could be beneficiaries of the Q1 reporting season, the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) could be standouts. While the first quarter isn’t yet over, some positive earnings trends are afoot. Notably, the negative earnings per share (EPS) revisions put forth by sell-side analysts in January and February were below average.
That’s meaningful because in any given quarter, the first two months are the period in which analysts typically raise or trim EPS forecasts.
Q1 EPS Trends Could Favor QQQ, QQQM
The sector allocations found in QQQ and QQQM could be supportive of strength when first-quarter earnings reports start rolling in.
“At the sector level, seven of the eleven sectors witnessed a decrease in their bottom-up EPS estimate for Q1 2024 from December 31 to February 28, led by the Energy (-12.0%) and Materials (-11.8%) sectors,” noted FactSet’s John Butters. “On the other hand, four sectors recorded an increase in their bottom-up EPS estimate for Q1 2024 during this period, led by the Consumer Discretionary (+2.3%) and Communication Services (+2.0%) sectors.”
The energy sector accounts for less than a half a percent of the Invesco ETFs’ rosters, while the funds feature no exposure to materials stocks. Conversely, QQQ and QQQM allocate 28.5% of their combined weights to the communication services and consumer discretionary sectors.
Tech & Utilities Fared Well in Q1
The only other sectors that saw positive changes in first-quarter EPS estimates from the end of 2023 through February 28 were technology and utilities. The former is by far the largest sector exposure in QQQ and QQQM. Financial services and real estate — two other potential Q1 EPS offenders — combine for just 0.74% of the ETFs.
Still, the average decline in bottom-up EPS forecasts in the first two months of this year was just 0.5%. That represented an improvement over long-term averages.
“During the past ten years, the average decline in the annual bottom-up EPS estimate during the first two months of the year has been 0.7%,” concluded Butters. [“And during] the past fifteen years, the average decline in the annual bottom-up EPS estimate during the first two months of the year has been 1.7%. During the past 20 years, the average decline in the annual bottom-up EPS estimate during the first two months of the year has been 1.5%. [And during] the past 25 years, the average decline in the annual bottom-up EPS estimate during the first two months of the year has been 1.6%.”
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