Earnings Roundup: Major Sector Changes Are Coming To The S&P 500

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by: Lipper Alpha Insight

By David Aurelio

The Global Industry Classification Standard (GICS) sectors are about to undergo a major reshuffle that will impact the Consumer Discretionary, Information Technology, and Telecommunication Services sectors. Combined, these three sectors account for over 40% of the S&P 500's market cap. The change impacts a large portion of the index and unlike the previous change that broke out the Real Estate sector from the Financials sector, this reclassification is not clean.

Exhibit 1: Comparison of S&P 500 New to Current GICS Sectors

Source: Thomson Reuters I/B/E/S

On Monday, Sept. 24, 2018, a new GICS sector, Communication Services, will be implemented. The new sector will replace the Telecommunication Services sector and include the addition of select companies from the current Consumer Discretionary sector's Media industry group and Internet & Direct Marketing Retail sub-industry as well as select companies from the Information Technology sector. There are also some one-off reclassifications such as eBay Inc.'s (NASDAQ:EBAY) change to Consumer Discretionary from Information Technology. Within the S&P 500, this will reclassify 23 companies and roughly 10% of the index's market cap.

Exhibit 2: S&P 500 Communication Services Sector Composition by Prior Classification

Source: Thomson Reuters I/B/E/S

Companies currently classified as Consumer Discretionary will make up 29% of the new sector, 51% will be companies currently classified as Information Technology, and 20% will be companies currently classified as Telecommunication Services. Some of the larger additions to the Communications Services sector will be Facebook Inc. (NASDAQ:FB), Alphabet Inc. (GOOGL, GOOG), Comcast Corp. (NASDAQ:CMCSA), Walt Disney Co. (NYSE:DIS), and Netflix Inc. (NASDAQ:NFLX). As a result, the addition of high growth names is expected to change the value oriented Telecommunication Services forward four quarter (F4Q) P/E from 10.4 to 18.5 for the newly combined sector.

Exhibit 3: S&P 500 YoY Earnings Growth Rates by New and Prior Sectors

Source: Thomson Reuters I/B/E/S

The S&P 500's 18Q3 year-on-year (YoY) earnings growth for the Information Technology Sector is expected to increase under the new classifications to 20.0% from 17.1% as earnings growth from companies such as Apple, Inc. (NASDAQ:AAPL), which is expected to increase earnings by 34%, and Micron Technology, Inc. (NASDAQ:MU), which is expected to increase earnings by 75%, become more heavily weighted. Conversely, the Consumer Discretionary Sector is expected to post lower YoY 18Q3 earnings under the new classifications, declining to 12.7% from 15.4%. This is due to the loss of companies such as Comcast (20.7%), Disney (24.8%), and Netflix (135.2%).

To help with the massive change, we've posted two versions of the Sept. 20, 2018, S&P 500 Earnings Scorecard with the current and proposed classifications.

The S&P 500 Earnings Scorecard with current GICS sector classifications can be found here.

The S&P 500 Earnings Scorecard with proposed GICS sector classifications can be found here.

Please note: If you use our earnings data, please source Thomson Reuters I/B/E/S.