Time to Tap Wall Street ETFs on Earnings Strength?
Despite concerns about inflation and the likelihood of interest rates remaining high for long, stocks have shown resilience in recent weeks. This resilience can largely be attributed to better-than-expected first-quarter earnings. Analyst projections imply that S&P 500 earnings will rise 17% from the first to the fourth quarter, per JPMorgan Chase Co.’s Marko Kolanovic.
Let’s delve a little deeper.
Strong Q1 Earnings Driving Market Sentiment
With 80% of S&P 500 companies having reported, the index is on track for 5% growth in first-quarter earnings per share, the highest year-over-year increase since Q2 of 2022, per a Yahoo Finance article. There is an 8.6% rally in the S&P 500 so far this year despite flat performance in the past month (due to rising rate woes). Bullish strategists suggest that an upbeat Q1 earnings season will likely provide the needed support for further market gains.
Cost-Cutting Helping Profit Margins
The growth in earnings has been primarily driven by cost-cutting measures rather than revenue increases. Both tech and non-tech sectors have employed similar strategies, leading to higher net profit margins in Q1 compared to the five-year average and the previous year, per FactSet, as quoted on Yahoo Finance.
Optimistic Analyst Forecasts for Q2
Although some companies have provided lower earnings per share guidance for the second quarter, analysts have generally maintained optimistic forecasts. In fact, through the first month of Q2, analysts have raised their earnings projections for the S&P 500 companies, contrary to the usual trend of downward revisions during this period.
Analysts boosted their earnings per share projections for companies in the S&P 500 by an aggregate of 0.7% in comparison to a typical decline of 1.8% over the past 20 years. Moreover, so far, 55% of the companies that have reported have given a lower EPS guidance than what analysts expected for Q2 of 2024. The figure came in at way below the 10-year average of 63%, per FactSet, as quoted on Yahoo.
Broadening U.S. Market Rally in the Cards?
An unexpected optimism derived from the corporate earnings is seen as a bullish signal for the market, despite uncertainty surrounding monetary policy. Upbeat earnings for many other companies this reporting season have helped narrow the gap with the so-called Magnificent Seven.
Top-Ranked ETFs in Focus
Overall, better-than-expected Q1 S&P 500 earnings and the recent pullback in stock prices took P/E multiples of several key U.S. benchmarks back to attractive levels, according John Stoltzfus at Oppenheimer Asset Management. Against this backdrop, investors can play the below-mentioned top-ranked Wall Street ETFs.
iShares Core S&P 500 ETF IVV – Zacks Rank #2 (Buy)
The underlying S&P 500 Index measures the performance of the large-capitalization sector of the U.S. equity market. The fund charges 3 bps in fees.
First Trust Capital Strength ETF FTCS – Zacks Rank #2
The Capital Strength Index is an equal-dollar weighted index which provides exposure to well-capitalized companies with strong market positions based on strong balance sheets, a high degree of liquidity, the ability to generate earnings growth, and record financial strength and profit growth. The fund charges 55 bps in fees and yields 1.35% annually.
Vanguard Dividend Appreciation ETF VIG – Zacks Rank #1 (Strong Buy)
The S&P U.S. Dividend Growers Index consists of common stocks of companies that have a record of increasing dividends over time. The fund charges 6 bps in fees and yields 1.82% annually.
VanEck Semiconductor ETF SMH – Zacks Rank #1
The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund charges 35 bps in fees and yields 0.48% annually.
Industrial Select Sector SPDR ETF XLI – Zacks Rank #2
The underlying Industrial Select Sector Index includes companies from the following industries: industrial conglomerates; aerospace & defense; machinery; air freight & logistics; road & rail; commercial services & supplies; electrical equipment; construction & engineering; building products; airlines; and trading companies & distributors. The fund charges 9 bps in fees and yields 1.50% annually.
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Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
VanEck Semiconductor ETF (SMH): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
iShares Core S&P 500 ETF (IVV): ETF Research Reports
First Trust Capital Strength ETF (FTCS): ETF Research Reports