Focus on These Sectors for Earnings Momentum into 2017


Click on the above Excel spreadsheet to show the three sectors that have seen upward revision to forward earnings growth, at a time when the pattern is usually downward, in terms of the direction of expected earnings growth revisions.

The three sectors are Energy, Financial’s and Technology.

A little (hopefully) helpful explanatory detail for readers:

1.) Energy is lapping losses in Q1 ’16 for the first half of 2017, so while the percentages look large, the comparable base from Q1 and Q2 ’16 might be quite small. Nonetheless, the earnings revisions continue to move higher. What will be helpful to show next (not on this link) is revenue estimates and changes therein for the Energy sector. Q4 ’16 will be the first substantial positive EPS and revenue growth for the Energy sector since mid-2014. (Clients are overweight Energy, with a 10% weight in a lot of accounts, using XLE, IYE, OIH.)

2.) Technology still looks pretty good for the first half of ’17 even though a number of the higher P.E tech growth stocks – like FANG – have stopped dead since November 8th. Look at Q3 ’16’s 11% earnings growth for the sector. As recently as July ’16, consensus for Q3 ’16 was for 2% growth in the 3rd quarter. The Iphone 7 early expectations were quite tempered and yet the iPhone was received well in the initial weeks of its sales period. Certainly the semiconductor companies have been on fire – Micron’s estimates nearly doubled for fiscal ’17 after they reported last week. Micron’s expected fiscal 2017 EPS estimate was $1.11 after the September ’16 report, but after last week’s earnings release, the new fiscal 2017 estimate is $2.37, or more than double in just 3 months. (Long Apple, MU, overweight Tech for clients.)

3.) Financial’s also look good for the first half of 2017, and then start to fade. Really from Q4 ’16 and Q1 ’17 and then expected growth starts to slow. Puzzling I must say, but that is strictly from reading the numbers. (Neutral to overweight Financials for clients. Top 4 positions are Schwab, JP Morgan, CME and Goldman Sachs).

The key element to January’s earnings reports is that management’s usually issue or tighten full-year ’17 guidance.

Analysis / conclusion: the three sectors listed above comprise about 40% of the SP 500, maybe a little more given Energy’s and Financial’s appreciation. These revision patterns matter as has been written here frequently over the last few years. So much though in terms of “expected return” in 2017 will come from tax reform, deregulation, and more aggressive management’s, which ultimately filter into earnings and revenue growth.

Thanks for reading. The goal for the New Year will be shorter, tighter, blog posts, and less “War And Peace”.



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