Consumer, Industrials, Energy ETFs in Focus as Earnings Season Kicks Off

Investors will have to look past this upcoming earnings season if they want good news on corporate profits.  

Earnings per share for companies within the S&P 500 are expected to decline by 6.8% in the first quarter, the biggest decrease since the second quarter of 2020, when lockdowns weighed on the economy in the early days of the pandemic. 

Analysts expect earnings to fall by 4.6% in the second quarter before growing again in 3Q (+2.1%) and 4Q (+9%), the latest data from FactSet shows. 

Of course, those optimistic second-half forecasts are subject to change depending on how economic dynamics unfold. 

And as always, growth will vary quite significantly from sector to sector.  

Consumer Discretionary Leads  

For the first quarter, the consumer discretionary sector is expected to see growth of 34%, the best of any sector by far. The same holds true for the year as a whole; earnings for the consumer discretionary sector are anticipated to rise by almost 26%, faster than any other sector. 

The largest holdings in the Consumer Discretionary Select Sector SPDR Fund (XLY) include Amazon.com Inc., Tesla Inc., Home Depot, Nike Inc. and McDonalds Corp.  

Amazon alone makes up nearly a quarter of the ETF and is expected to double its earnings per share this year.  

After consumer discretionary, the strongest 1Q earnings growth is expected to come from industrials (+12.6%) and energy (+9.2%).  

For industrials, that strength extends throughout the year. Full-year profits are anticipated to jump 11.1%. But that’s not the case for energy, which has the worst full-year profit outlook—an earnings decline of 21.5% is expected. 

After surging in 2022, energy prices have cooled off in 2023, though recently announced OPEC production cuts have pushed oil prices off their lows for the year.  

Interestingly, despite the turmoil in the regional banking industry we saw in March, the financials sector is expected to see strong earnings growth. Analysts are forecasting 2.4% growth for 1Q and 10.5% growth for the full year. 

However, analysts have just started to trim their earnings forecasts for the banks, so these numbers could potentially come down. Suffice it to say, there is a lot of uncertainty surrounding the profit outlook for this sector in particular.  

The big banks kick off the earnings season this Friday, with reports from JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. all expected on that day.  

Do Earnings Still Matter? 

Earnings are the lifeblood of the equity market. 

However, in the short term, that relationship doesn’t always hold. Multiples—the amount investors are willing to pay for a given amount of earnings—can go up and down significantly for all sorts of reasons, and their movement often overwhelms any change in profits. 

For instance, this year, tech is one of the best-performing sectors within the stock market, with a 20% gain for the Technology Select Sector SPDR Fund (XLK). But earnings for the sector are expected to decline by 0.4% in 2023.  

Long term, the ultimate driver of share prices is cold hard profit.  

Profits for industrial companies are forecast to rise around 11% this year, but the Industrial Select Sector SPDR Fund (XLI) has only risen by 0.6%, underperforming the broader market.  

There are a number of reasons stock performance might disconnect from earnings growth in the short term.  

Perhaps the growth is already priced in; or investors don’t anticipate the growth to last; or they just aren’t willing to pay for the growth due to various factors.  

In the case of high-growth technology stocks, falling long-term interest rates have boosted the value of future earnings, increasing the multiples that investors are willing to ascribe to those businesses.

So, yes, over the long term, earnings are the primary driver of stocks, but that says nothing about the short term.  

For a snapshot of sector and earnings performance for 2023, see the table below:  

*FactSet estimates 

Follow Sumit Roy on Twitter @sumitroy2