Which Sectors Looking Better for Q4 ’16 ?

Per Thomson Reuters, 423 of the SP 500 have posted Q3 ’16 financial results, and regardless of what you hear in the financial media, Q3 ’16 earnings are pretty solid.

Q3 ’16 earnings are up 3.9%, Q3 ’16 revenue growth is +2.5% and Ex-Energy, Sp 500 have increased 7.5%. We noted the good results last week here.

Many retailers report this coming week and the quarterly reports are thought to conclude with WalMart’s report, which could be a bit of drag on Q3 ’16, but let’s wait and see what the mass merchant retaller’s like Macy’s, Nordstrom’s and Kohl’s have to say on Thursday, November 10th.

Here is what the data shows for EXPECTED growth by sector for Q4 ’16:

  • Consumer Discretionary: +3.5% as of 11/4, vs expected growth of 7.9% as of October 1 (mostly Amazon’s tempered results hurting sector)
  • Consumer Staples: +8.3%, vs +9.3% as of October 1;
  • Energy: +2.9% vs +2.5% (deserves a separate blog post – even though crude oil down, Energy earnings could be better in q4 ’16)
  • Financials: +15.4%, vs +13.7% (the only sector to show a positive return since 9/30/16 – stay with Financial’s for Q4 – the higher revisions a definite plus)
  • Health Care: +6.4% vs +8.3% (the drug distributor stocks have gotten crushed. The sector revision’s not yet alarming though.)
  • Industrials: -2.6% vs +2% as of October 1
  • Basic Materials: +7.3% vs. +21.7% as of October 1
  • Real estate: +2.5% vs. +4.1%
  • Technology: +7% vs +6.1% (Tech is the other sector that has seen upward revisions since October 1 for Q4 ’16 – important tell)
  • Telco: -0.3% vs +2.1% as of October 1
  • Utilities: +11.1%, vs +16.7%

SP 500: +6.6% vs +8.3% as of October 1

Conclusion: Technology and Financial’s are showing upward revisions to Q4 ’16 earnings which (again) is atypical of the normal pattern, hence I would encourage readers to heed the revisions and stay with the sectors. These two sectors are our largest overweight’s for clients, but really that has been the case for most of this decade. Tech and Financials had their bear markets from March, 2000 through 2009 thus even the Tech companies that are growing rapidly – like the FANG stocks – are not as nearly overvalued as the tech stocks of the 1990’s. (Long Facebook, Amazon, Google).

Energy and Health Care deserve a separate blog post (each) which are coming tomorrow, and Monday, 11/7.

For now, continue to stay with Tech and Financials. The market weakness, and the “down 9 days in row” losing streak are what they are, but as long as these two sectors see earnings and revenue revisions moving the right away, the downside to the SP 500 has to be limited since Technology and Financial’s are still close to 35% – 40% of the SP 500 by market cap.

Thomson Reuters data (by the numbers);

Forward 4-quarter estimate: $128.56

P.E ratio: 16.54(x)

PEG ratio: 4.6(x)

SP 500 earnings yield: 6.05%

Year-over-year growth of forward estimate: $128.56 – third week in a row it has moved lower.

The SP 500 earnings yield has been above 6% for five weeks in a row now, since the forward estimate is now firmly positive but the SP 500 is testing its 200-day moving average. Something will have to give one way or the other, but i suspect we will see a pretty healthy stock market rally shortly.


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