Looking at the change in "expected" sector growth rates for Q2 '16, Technology is the clear winner, and the fact is Apple (NASDAQ:AAPL) has a lot to do with that.
No question the big dog in the yard has made his presence felt (Apple that is.)
Here is the change in Q2 '16 sector earnings growth estimates between July 1, 2016 and August 5, 2016:
- Consumer Discretionary: +12.5%, vs. +9% on July 1 for 350 basis point improvement in growth.
- Consumer Staples: +0.3% vs. -1.2% for a 150 basis point improvement in growth.
- Energy: -84.6% vs. -78.7% for a 590 basis point deterioration in growth.
- Financials: -5% vs. -2.3% for a 270 basis point deterioration in growth.
- Health Care: +7.3% vs. +4.5% for a 280 basis point improvement in growth.
- Industrials: +2.5% vs. +4.2% for a 170 deterioration in growth. GE (NYSE:GE) and Honeywell (NYSE:HON) both had a tough quarter.
- Basic Materials: -7.1% vs. -9.9% for a 280 basis point improvement in growth.
- Technology: +0.6% vs. -5.7% for a 630 basis point improvement in growth.
- Telecom: -1.2% vs. -0.5% for a 70 basis point improvement in growth.
- Utilities: +4.7% vs. +2.1% for a 260 basis point improvement in growth.
- S&P 500: -2.6% vs. -3.8% for a 120 basis point improvement in growth.
Technology's 630 basis point in higher growth revision is reflected in the bounce in Technology in July 2016, when the sector rose 7% on the month.
More importantly, for Q3 '16, Technology is the only sector to see its expected growth rate revised higher, from +2.4% as of July 1 to +3.1% as of August 5th, not a huge amount but every other sector has seen lower revisions for Q3 '16 since July 1 so "relatively" speaking Technology's earnings growth is looking quite good. Given that higher revision for Q3 '16 in the face of lower revisions for other sectors, look for Tech's relative strength to continue.
By the Numbers: (Source: Thomson Reuters data)
- Forward 4-quarter estimate: $126.12 vs. last week's $126.52
- P/E ratio: 17.3(x)
- PEG ratio: 12(x) - not meaningful
- S&P 500 earnings yield: 5.78% vs. last week's 5.83%
- Year-over-year growth of the forward estimate: +1.48%, versus last week's 1.30%, and the highest growth rate since April 29, 2016.
Analysis/conclusion: The S&P 500 starts to lap the collapse of China last summer in August-September, which, while it was a market event in China, was also economic and started to show up in Q3 '16 earnings for the S&P 500. Technology's numbers look very good - the higher expected earnings growth rates and the positive revisions bode well for the sector, even though I thought Apple might be a drag when this was written a few weeks ago.
Lapping the "China comps" from last summer should start to pull the "y/y growth in the forward estimate" higher, but I've been expecting that for 10 months now and have been clearly wrong.
Coming into 2016, the two largest sector overweights for clients were Technology and Financials, and both were crushed YTD 2016 as of June 30th. Both have come back nicely with Technology the stronger of the two. Financials had a good day today as the 10-year Treasury yield rose off the strong payroll report. Financials need a steeper yield curve to outperform: think 2013.
Thanks for reading - more to come this weekend.