Consumer & Financial Sector ETFs Lead Way

May 29, 2019

Heading into 2019, one of the biggest fears among investors was the idea of an “earnings recession,” a situation where corporate profits decline for two quarters or more in a row. A few months later, those concerns are starting to fade.

The latest figures from FactSet suggest that first quarter earnings for S&P 500 firms will be down 0.5% from a year ago, much less than the 3.9% decline analysts were expecting at the end of March.

Moreover, with 76% of companies beating estimates by an average of 5.5%, there is a good chance that when the earnings reporting season is officially over, first quarter profit growth will end up in positive territory. About 10% of S&P 500 companies have yet to report.

Flat earnings for the first quarter is a much better situation than investors had feared only weeks ago, and raises hopes that full-year 2019 earnings can grow by 3.3% or more, as analysts currently expect.

Uneven Profit Growth
Yet even if earnings end up rising in 2019, that growth will be far from even. For example, the difference between the sector with the strongest earnings growth and the weakest is a whopping 16.3%.

Consumer discretionary is expected to see profit growth of 7.2% compared to an expected profit decline of 9.1% for energy. Likewise, earnings for financials and utilities are forecast to grow more than 6%, but earnings for tech and consumer staples are anticipated to barely grow.

That said, it’s important to understand that profit growth doesn’t necessarily correlate with performance—in the short term.

Sector ETF 2019 Earnings Growth Est. YTD Return
Consumer Disc. XLY 7.2% 16.2%
Financials XLF 7.1% 14.0%
Utilities XLU 6.3% 13.1%
Industrials XLI 5.4% 16.9%
Comm. Services XLC 5.3% 18.1%
Health Care XLV 5.1% 4.1%
S&P 500 SPY 3.3% 14.8%
Real Estate XLRE 2.8% 18.5%
Tech XLK 0.7% 20.7%
Consumer Staples XLP 0.1% 14.3%
Materials XLB -6.4% 8.0%
Energy XLE -9.1% 11.6%

Sources: FactSet, Bloomberg; return through May 22, 2019


Even though technology is near the bottom end in terms of profit growth, it’s at the top in terms of performance. Similarly, health care, where profits are growing faster than the S&P 500, is the worst-performing sector—largely due to political head winds.

Nevertheless, over longer-term periods, profits tend to drive returns, so earnings growth is a key factor to keep an eye on for investors.

Domestic/International Divergence
Sector performance isn’t the only place where earnings divergence is showing up. There is a similar gap between profits for domestic-focused and internationally focused companies.

“For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate [for Q1] is 6.2%,” wrote John Butters, senior earnings analyst at FactSet. “For companies that generate less than 50% of sales inside the U.S., the blended earnings decline is -12.8%.”

That huge divergence—spurred by the ongoing trade war, weak overseas growth and strength in the U.S. dollar—is something to keep an eye on.

Something like the iShares Russell 1000 Pure U.S. Revenue ETF (AMCA), which holds stocks of companies that generate 85% or more of their sales from the U.S., should outperform if domestic-focused firms continue to do better on the earnings front.

However, that outperformance has yet to show up. So far this year, AMCA is up 13.8%, less than the 14.9% return for the S&P 500, which gets around 66% of its sales from the U.S.

Looking Ahead
Investors should keep an eye on the health of the U.S. economy, especially relative to the rest of the world, to determine whether the outsized profit growth for consumer discretionary, financials and utilities can continue—three sectors closely tied to domestic growth (and that are the three largest sector holdings of the aforementioned AMCA).

In contrast, the energy and materials sectors will be influenced by global developments and their impact on commodity markets.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

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