bear market vs bull market

Stock Market Sector Winners & Losers, Ahead Of Earnings Season

What is the best and worst stock market sector as we approach earnings season?

My last blog post highlighted the overall strength that is being forecast for the Q4 Earnings Season. With a current estimate for the S&P 500 of 10.9%, companies are lining up to report solid earnings. As I pointed out, valuations (in the form of P/E) are high, and so it is important that the earnings season meets (and even beats) expectations. Otherwise there will be blood in the water, and a market correction could be in the near future. This bull market has been driven by earnings, and without earnings growth fuel, the fire could quickly die.

But what is under the covers, are there sectors that are poised to breakout? Which stock market sector is underperforming? At this stage of the bull market, being able to accurately move into solid sectors, and ditch weaker sectors, is one key to outperformance.

We are poised two weeks before Earnings Season, so what clues do we have about the performance? I look to  these three factors:

  1. The overall growth in the estimates for each sector (year over year)
  2. The movement of these estimates in the prior two months – this can really show which sectors have momentum, and improving prospects.
  3. Which sectors have companies that have issued downward guidance in the past two months?

With that in hand, here are some very interesting stats about current stock market sector winners and losers.

The Winner:

By far, Energy stocks are on a roll. They have been growing earnings at a ridiculously fast pace, and look to continue the trend. One word of caution: these growth rates look so inflated because they are coming from a low base. Factset is reporting that Earnings growth in Q4 is estimated to be 132%, and even better, this has grown from an 88% forecast in September. So momentum and growth are both lined up in this stock market sector.

Honorable mentions will go to Materials (with 28+% growth) and Technology (with  16+% growth). Technology is notable as they have been consistently strong through all of this year.

The Loser:

Telecom is the stock market sector that continues to be at the bottom of Earnings growth. They are estimated to report a 1% increase this quarter. Last quarter was negative so maybe there is a glimmer of hope.

Other slow growth sectors include Industrials at 1.8% and Consumer Discretionary at 2.3%. Industrials  is one of the sectors that have such diverse industries it is worth looking into the industries that make up each sector. For example: Airlines, Professional Services and Conglomerates (think GE) are all down around 18% – other industries that make up this sector fare much better. For Consumer Discretionary, this one might do better than estimated. Reports of a solid Christmas season could buoy this sector. Given current growth in employment and income, this sector should be performing.

So there you have it. Keep an eye on results over the next couple of months. These results will be a good indication of which stock market sectors are going to be winners in 2018.