Q4 ’16 Earnings Season: Updating the Sector Calls

Updating this article from the last week of December, 2016 and this article from early, 2017, here is an update to the three favored sectors as Q4 ’16 earnings season began:

FC – sectorupwardrev122516 (The spreadsheet is dated 12/25/16, but the numbers are updated as of 1/27/17).

Source: Thomson Reuters I/B/E/S – This Week in Earnings.

Per Bespoke, here is the YTD 2017 sector performance for the SP 500 as of 1/27/17:

  • Basic Materials: +6.24%
  • Technology: +5.88%
  • Cons Disc: +4.47%
  • Industrial’s: +3.11%
  • SP 500: +2.44%
  • Financials: +1.60%
  • Health Care: +1.09%
  • Cons Spls: +0.95%
  • Utilities: -0.48%
  • Energy: -2.05%
  • Telecom: -3.52%

(Source: Bespoke’s Weekly Letter dated 1/27/17, and for some reason they didn’t include Real Estate in the sector list)

The real disappointment has been Energy since it was almost exactly one year ago that the price of crude oil dropped to $28 per barrel, which means that we’ve seen a roughly 90% – 100% increase in the price of crude the last 12 months, and yet Q4 ’16 Energy earnings are a significant disappointment, (note the negative downward revisions on the above spreadsheet). Energy is down 2% year-to-date. (Overweight Energy with a 8% – 12% weighting, via OIH, IYE, XLE.) Chevron has a terrible earnings report on Friday, 1/27/17. Big misses on both EPS (earnings per share) and revenue. Exxon and Chevron have been like dueling banjo’s: Chevron had a strong upside report in Q3 ’16, reported last October ’16, while Exxon missed. The two stocks together comprise 30% – 35% of the XLE and IYE. This is a 6-9 month trade for clients, as the sector laps a complete eradication of profits from Q1 ’16. Factset notes in their great earnings work that Energy net income will total about $48 billion in Q1 ’17, versus just the $8 billion in net income in Q1 ’16, so while the year-over-year earnings increases are quite sizable, it seems to be the lack of upward revisions that is keeping a lid on the sector.

Technology has reversed a poor 4th quarter, 2016 performance and really a tepid year in 2016, as the Nasdaq and Nasdaq 100 returned 7.5% and 5.89% respectively in calendar, 2016, below the SP 500’s +11.96%.

The Big Dog in the Yard, Apple (AAPL) reports this week, so to some degree, as Apple goes, Technology sector trading will be influenced. (Long Apple, Overweight Technology.Largest Tech position is MSFT.) Apple is up 6% YTD through 1/27/17 and as it heads into Tuesday night’s earnings

The Financial sector is still working off its glow from the sharp rally post-election in November, 2016, but the earnings have been inline (see the spreadsheet) and more importantly, for our top holdings, Charles Schwab (SCHW), JP Morgan (JPM), and Goldman (GS), forward estimates have seen upward revisions. CME reports this coming week and is one of client’s top 5 financial positions.

Analysis/Conclusion: It may come as a surprise to many readers  that Amazon (AMZN) is not contained within the ‘Technology” sector of the SP 500, but rather the Consumer Discretionary sector, and not only that, but Amazon is now the #4 stock in the SP 500 by market cap currently, thus the stock has a tremendous influence on the Consumer Discretionary sector. Amazon’s 11% YTD increase since 12/31/16 could be the driver behind the Consumer Discretionary’s nearly 6% YTD return.

No major changes are planned in terms of sector allocations as of this writing, although the bounce in Basic Materials, which is just 3% of the SP 500 by market cap, is evidence of the commodity bounce, and the potential for a “return-to-global-growth” theme. The “dividend” and “safety” trades are dead in my opinion, so clients wont own any REIT’s, Utilities, Staples, Telco, in any size, unless there is a specific catalyst to the name.

Thanks for reading. The next article will be an Apple earnings preview, late tonight or Monday morning.

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