Gloomy Earnings Outlook Could Hamper U.S. Equities

The champagne has been popping in U.S. equities after the Dow Jones Industrial Average and S&P 500 rallied to new highs, but the bartender may be announcing the last call sooner than investors think. A gloomy earnings outlook could tamp down gains for U.S. equities moving forward from a better-than-anticipated third quarter.

According to a CNBC report, companies comprising the S&P 500 “now expect to grow their earnings by less than 1% year over year, compared with a 23% growth rate just 14 months ago, the bank pointed out. Historically, declining earnings expectations didn’t bode well for stocks as the last six times in the past 35 years have all seen compression in stock valuation and declines in the S&P 500, UBS said.”

“There is no debate on S&P 500 forward earnings: a contraction appears imminent,” UBS equity strategist Francois Trahan said in a note Tuesday. “An actual contraction in forward earnings usually spells a difficult backdrop for the overall equity market.”

“The breadth in expectations is equally troubling,” Trahan said. “The most troubling part of all this is that it appears unlikely that the earnings picture will improve anytime soon.”

For investors who are bullish on international equities outperforming U.S. equities, this sets up a play for relative weight ETFs. In particular, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) gives investors the opportunity to capitalize on their hunch that international equities will outdo U.S. equities.

As for the fund, RWIU seeks investment results, before fees and expenses, that track the FTSE All-World ex US/Russell 1000 150/50 Net Spread Index. The FTSE All-World ex US/Russell 1000® 150/50 Net Spread Index (R1AWXUNC) measures the performance of a portfolio that has 150 percent long exposure to the FTSE All-World ex US Index and 50 percent short exposure to the Russell 1000® Index.

On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150 percent and the weight of the Short Component is equal to 50 percent of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express an international over domestic investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.

On the flip side, for investors sensing continued upside in U.S. equities over international equities, the  Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

For more relative market trends, visit our Relative Value Channel.