SP 500 Earnings: Fade Tech, Buy Financials ?

Corporate high yield as symbolized by the HYG ETF, outperformed the SP 500 this week, returning +0.61% vs the SPY’s +0.51%.

I would think that would bode well for forward returns for the SP 500, as the key benchmark is now just 35 points or so away from the Sept. ’18 all-time-highs of 2,940 – 2,942.

Credit markets seem to remain healthy, as you would think they would with the FOMC minutes this week noting the Fed is on hold.

No doubt the credit markets and the Energy sector in particular were helped by the Chevron (CVX) acquisition of Anadarko Petroleum (APC), with Anadarko being split-rated in terms of its credit rating between BBB / Ba1. Chevron is rated AA-/Aa2 by Standard & Poors and Moody’s. (According to one blog, Anadarko credit tightened 50 – 100 bp’s on the buyout news.)

JP Morgan was previewed last night as JP Morgan remains client’s 4th largest holding as of 3/31/19.

The “Tech vs Financials” trade was previewed March 21 – look at the earnings growth of Financials vs Tech, but I think Apple is distorting Tech too.

SP 500 Weekly Earnings Data: (Source: I/B/E/S by Refinitiv)

  • Fwd 4-qtr est: $172.34 vs last week’s $173
  • PE ratio: 16.8x
  • PEG ratio: 2.63x
  • SP 500 earnings yield: 5.93% vs last week’s 5.98%
  • Year-over-year growth of fwd est: +6.4% vs last week’s +6.7%

Summary / Conclusions: The Tech sector returned 20% in Q1 ’19, even though Technology sector earnings are expected to fall 6.1% as of this week’s This Week in Earnings. This will be the worst week for Technology sector earnings since – guess when – Q1 ’16’s -4.1% y/y decline. (Q1 ’16 was the bottom of the last correction that began mid-2015, prior to Q4 ’18’s 20% peak-to-trough SP 500 correction.)

Only IBM and Netflix from the Tech sector (and Netflix is contained within the Consumer Discretionary sector) will report next week, while 67 Financial stocks (source IBES by Refinitiv) are expected to report between April 15th through April 18th, so if you see a bump in the Financial’s on earnings reports, its understandable given how the sector has performed over the past 15 months.

By the way, the bank results from this morning which included the positive surprises from JPM and PNC banks will not be in the IBES numbers until next week. The “forward 4-quarter estimate” is as of Thursday night every week.

Tech sector out-performance has been impressive this year, but don’t be surprised to see it fade through the next three months.

Despite the strong day from the Dow 30 and the SP 500, Apple was red today on average volume. It could very well be a wrong opinion, but I think Apple is done as technology leader for some time.

Thanks for reading.


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