One Last Earnings-Related Table: The Rationale For A Financial Sector Overweight

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Includes: BTO, DMRL, EPS, FAS, FAZ, FINU, FINZ, FNCL, FXO, IVV, IYF, IYG, JHMF, PPLC, RSP, RVRS, RWW, RYARX, RYF, SDS, SEF, SFLA, SH, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SSO, UPRO, USMC, UYG, VFH, VFINX, VOO, XLF
by: Brian Gilmartin, CFA
Summary

Which sectors had the biggest percentage declines in earnings estimates from October 1 '18, or the point when the correction started?

Financials show that the Street is expecting not only the highest rate of absolute earnings growth heading into the bulk of Q1 '19 earnings, but that of all the sectors - except Utilities - Financials have shown the least degradation of expected earnings growth of all the S&P 500 sectors.

The numbers show that there is a good case for being overweight Financials in 2019.

This blog post addressing Financial sector earnings came out Thursday night, which didn't help readers, so I wanted to do one more dissection of expected S&P 500 2019 earnings and make the case for Financials from a different perspective.

The above I/B/E/S by Refinitiv table from This Week in Earnings shows that of the 11 S&P 500 sectors, Financials are expected to show the strongest EPS growth this year.

Will that change this week with the number of Financials reporting? Sure, it could, but after Friday's results, it's not expected.

However, let's dissect the above data a little more: which sectors had the biggest percentage declines in earnings estimates from October 1 '18, or the point when the correction started?

  • Cons Disc: Fell 500 bps or 43%% from October 1;
  • Cons Spls: Fell 490 bps or 80% from October 1;
  • Energy: Fell 3590 bps (wow!) to -9.7% from +26% - the buyout of APC will put a bid under parts of Energy;
  • Financials: Fell 120 bps, or 1.2%, for a 12% decline in 6 months;
  • Health Care: Fell 280 bps, or 2.8%, for a 33% drop. Health Care always follows this pattern - actual sector growth should end up near 10%;
  • Industrials: Fell 540 bps, or 5.4%, for a 44% drop;
  • Basic Materials: Fell 1850 bps, or 18.5% to - like Energy huge drop from big positive to big negative;
  • Real Estate: Fell 270 bps, or 42%;
  • Technology: Fell 1040 bps, or 10.4%, from 8.5% to -1.6%;
  • Communication Services: Fell 840 bps, or 8.4%;
  • Utilities: Fell just 20 bps from 4.7% to 4.5%, or just 4%;
  • S&P 500: Fell 730 bps, or 7.3%, from 10.2% to 2.9%;

(Source: IBES by Refinitiv, page 19 of This Week in Earnings. Calculations are my own)

Moral of the Story?

Financials show that the Street is expecting not only the highest rate of absolute earnings growth heading into the bulk of Q1 '19 earnings, but that of all the sectors - except Utilities - Financials have shown the least degradation of expected earnings growth of all the S&P 500 sectors.

In other words, the expected 8.5% growth rate for Financials has held up despite heavy negative revisions for the rest of the S&P 500.

Have S&P 500 earnings been revised too low, i.e., have Street expectations gotten too negative? I do believe that's the case, but that is one opinion.

Take all forecasts and opinions with a healthy dose of skepticism.

The numbers show that there is a good case for being overweight Financials in 2019. To be fair to readers, I've been overweight the sector for several years. Too many positives for the sector, not the least of which is a bull market in stocks and credit this year, but the valuations are reasonable and the sentiment is poor.

Thanks for reading.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.