Earnings season for the S&P 500 is coming to end with ~86% of companies having reported results. For Q1 2020, the expected earnings decline is -13.6% marking the worst quarterly decline for S&P since Q3 2009. The analysts’ community expects things to get worst from here, with the earnings decline over the next three quarters expected to be -40.6%, -23%, and -11.4%, respectively. Over the last month, the S&P is up 3% and has been range-bound, trading between 2700- 2950. The average volume traded per day has plummeted from 225 million shares a day to 93 million, signaling investor uncertainty as the market climbs back up to 3,000. Outside of fiscal or monetary stimulus from policymakers, it hard to see the market making new highs.
As earnings are expected to continue deteriorating, any move higher will be driven by multiple expansion. However, stocks are already expensive. The forward P/E ratio for the S&P 500 is currently 20.4x, this is the highest level since April of 2002. Investors are being asked to pay a premium on stocks at a time when uncertainty is at an all-time high, especially among company executives. Of the 430 companies that have reported, only 32 (7.5%) have been able to provide Q2 earnings guidance. Of those that have issued guidance, 50% expect earnings to decline. There isn’t much value at the sector level either. Every S&P 500 sector is trading at a substantial premium to its 20-year average P/E, except for Healthcare and Financials.
It hasn’t all been bad news though. Defensive sectors have seen earnings increase vs. the same time last year, with Healthcare and Utilities leading the way. Cyclical sectors- Consumer Discretionary, Financials, Energy, Industrials, and Materials all experienced a decline in earnings relative to the same time last year. From a fundamental and technical perspective, Health Care is the most attractive sector. According to the Factset, four of the six industries within Healthcare are reporting growth in earnings: Pharmaceuticals (18%), Health Care Technology (9%), Biotechnology (6%), and Health Care Providers & Services (3%). Top-line growth for Healthcare industries has also been impressive, with five out of six reporting higher revenues relative to the same time last year.
Investors have taken notice, the Healthcare sector (ticker: XLV) has outperformed the S&P 500 (ticker: SPY) by nearly 9% year-to-date (-1.9% vs. -11.29%). In addition, the valuation of Healthcare stocks is in line with its 20-year average 16.2 vs 16.1, suggesting there is room for the sector to move higher as multiple expansion would be supported by solid fundamentals. 80% of Healthcare companies have beat earnings estimates, 82% have beat revenue expectations. From a thematic standpoint, the Healthcare sector is seen as defensive and tends to outperform during times of uncertainty- underlying business models are not as sensitive to economic activity. For investors looking to allocate money in an expensive market, the Healthcare sector is looking healthy.
-Appo Agbamu, CFA
Ahrvo Score (Overall Score)
Technology (⬆️1 spot)
Utilities (⬇️1 spot)
Health Care (⬆️ 4 spots)
Industrials (no change)
Consumer Staples (no change)
Consumer Discretionary (no change)
Financials (no change)
Basic Materials (no change)
Energy (no change)
Momentum Score
Healthcare (no change)
Technology (no change)
Basic Materials (no change)
Consumer Staples (no change)
Utilities (no change)
Industrials (no change)
Consumer Discretionary (no change)
Financials (no change)
Energy (no change)
Growth Score
Industrials (⬆️1 spot)
Financials (⬇️1 spot)
Technology (no change)
Health Care ( ⬆️3 spots)
Consumer Discretionary (no change)
Consumer Staples (no change)
Utilities (no change)
Basic Materials (no change)
Energy (no change)
Quality Score
Consumer Discretionary (⬆️1 spot)
Industrials (⬇️1 spot)
Consumer Staples (no change)
Technology (no change)
Utilities (no change)
Energy (⬆️1 spot)
Financials (⬇️1 spot)
Basic Materials (no change)
Health Care (no change)
Value Score
Industrials (no change)
Consumer Discretionary (no change)
Utilities (⬆️1 spot)
Financials (⬇️1 spot)
Energy (no change)
Consumer Staples (no change)
Basic Materials (no change)
Technology (no change)
Health Care (no change)
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