Across the S&P 500, first-quarter earnings weren’t stellar, but there were some bright spots. With the end of the second quarter about three weeks away, market participants are waiting to see how earnings season shapes up for the June quarter.
Some may even be fretting about the arrival of second-quarter financial updates. However, exchange traded funds could offer some refuge. On that front, the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) could prove relevant.
“During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.4%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.9%,” noted FactSet’s John Butters. “Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the second quarter was smaller than the 5-year average, the 10-year average, the 15-year average, and the 20-year average.”
In other words, the second-quarter earnings outlook isn’t alarmingly bad, but there are some factors supporting QQQ and QQQM as potentially better earnings plays than other broader market ETFs.
Sector Support for QQQ, QQQM
One of the reasons that QQQ and QQQM could shine brightly during second-quarter earnings seasons is sector allocations. As Butters noted, nine of the 11 GICS sectors are experiencing downward earnings per share revisions, with energy and materials ranking as the worst offenders on a percentage basis.
QQQ and QQQM have no materials exposure and allocate a mere 0.38% of their weights to energy stocks. Conversely, the only sectors seeing upward earnings revisions for the June quarter are technology and communication services, which combine for over two-thirds of the ETFs’ rosters. That outlook is also applicable for the back half of 2023.
“At the sector level, seven sectors witnessed an increase in their bottom-up EPS estimate for CY 2023 from March 31 to May 28, led by the Communication Services (+3.1%), Consumer Discretionary (+2.5%), and Information Technology (+2.0%) sectors,” added Butters.
Consumer cyclical stocks account for 15% of QQQ and QQQM. In other words, just three of the 11 GICS sectors are experiencing positive earnings revisions for the third and fourth quarters, and that trio combines for more than 82% of the Invesco ETFs’ portfolios. Likewise, the groups with the worst earnings revisions are either lightly represented or not represented at all in the two ETFs.
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