The S&P 500’s net profit for the first quarter is 12.1%. That’s below the 12.3% forecast at the start of the quarter, but some sectors are expected to generate impressive margin growth.
Not surprisingly, energy is one of those groups, and that could be good news for exchange traded funds such as the Invesco S&P 500 Equal Weight Energy ETF (RYE). Despite the dominance of large-cap energy stocks this year, which of course trickles down to cap-weighted energy funds, RYE is up a scorching 46.39% year-to-date.
Home to nearly $581 million in assets under management, RYE follows the S&P 500® Equal Weight Energy Plus Index — the equal-weight equivalent of the cap-weighted S&P 500 Energy Index. The Invesco ETF could have a compelling earnings season if energy lives up to or surpasses margin expectations.
“At the sector level, four sectors are reporting (or are expected to report) a year-over-year increase in their net profit margins in Q1 2022 compared to Q1 2021, led by the Energy (11.1% vs. 4.6%) sector. On the other hand, seven sectors are reporting (or are expected to report) a year-over-year decrease in their net profit margins in Q1 2022 compared to Q1 2021, led by the Financials (17.2% vs. 22.7%) sector,” says FactSet’s John Butters.
On a quarter-over-quarter basis, energy’s profit margins are expected to increase 160 basis points — good for the second-largest increase among the 11 GICS sectors.
There’s another reason RYE is a relevant consideration today: Energy is one of the sectors best-suited to fight inflation, as evidenced by its returns. Conversely, inflation is proving to be a profit margin drag on plenty of other sectors.
“Higher costs are likely having a negative impact on net profit margins. Producer prices increased by 11.2% in March, which was the largest year-over-year increase on record. During the previous earnings season, 356 S&P 500 companies cited ‘inflation’ on earnings calls for the fourth quarter, which was the highest number in at least 10 years,” adds Butters.
Plus, there’s value in RYE, as about 54% of its 24 holdings are considered value stocks. RYE’s holdings range in weights of 4.17% to 5.10%. On the other hand, just two stocks — Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) — combine for over 44% of the cap-weighted S&P 500 Energy Index.
For more news, information, and strategy, visit the Portfolio Strategies Channel.
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.