Outlook Dims For Some Sectors, Brightens For Others
Energy wasn't the only sector to see a divergence between profits and performance. Even though real estate had the strongest earnings growth this year, performance for the Real Estate Select Sector SPDR Fund (XLRE) was barely positive, at 1.8%. A spike in interest rates during the second half of the year weighed on the outlook for the interest-rate-sensitive real estate sector and cut deeply into returns for the ETF.
The interest-rate spike had the opposite effect on financials. The sector saw paltry earnings growth of 0.2% in 2016, but the Financial Select Sector SPDR Fund (XLF) was one of the best-performing sector ETFs, with a 22.3% return.
Profits for financials are expected to get a lift in the coming year thanks to the widening spread between short-term and long-term interest rates, which benefits banks and insurance companies. Financials may also benefit from less onerous regulations once the Trump administration comes to power.
The industrial and materials sectors―which saw their earnings decline in 2016―may also get a boost from Trump's policies. His infrastructure spending plan is seen as a boon for those sectors. The Industrial Select Sector SPDR Fund (XLI) and the Materials Select Sector SPDR Fund (XLB) rose by 20.4% and 17.8%, respectively, this year.
On the flip side, health care was the only sector to end 2016 in the red. Despite growing earnings by more than 6%, health care stocks fell by 2.4% as measured by the Health Care Select Sector SPDR Fund (XLV). Accusations of price gouging against drugmakers and regulatory uncertainty ahead of the new presidential administration next year pressured XLV despite the earnings bump.
Contact Sumit Roy at [email protected]