The energy sector is the seventh-largest sector weight in the S&P 500 at just under 7 percent. Despite that relatively
diminutive status within the benchmark U.S. equity index, energy continues to be a drag on S&P 500 earnings.
With second-quarter earnings season winding down, some analysts are forecasting that the quarter will be the fifth consecutive
of year-over-year earnings declines for the S&P 500, with energy being a big reason why. Strip out energy for the second
quarter and S&P 500 earnings were probably flat.
Still, the Energy Select Sector SPDR (ETF) (NYSE: XLE) is up 13.5 percent this year, good for the second-best performance among the
sector SPDR exchange traded funds. XLE, the largest energy ETF, trails only the Utilities SPDR (ETF)(NYSE: XLU), which is higher by 19.1 percent year-to-date.
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ETF
Energy sector earnings are down nearly 79 percent year-over-year, according to AltaVista Research. The utilities sector, the
third-smallest sector weight in the S&P 500 at just 3.4 percent, has seen its earnings rise, but just to the tune of 2
percent.
“With about 85 percent of S&P 500 firms having reported Q2 results, it looks as if overall index earnings likely fell by
about $8.6 billion, or 3.3 percent (Figure 1). This is the fifth consecutive quarter of year-on-year declines in earnings. Given
current consensus estimates for Q3, it is likely that this earnings recession will grind on for one more quarter, before ending
with a positive showing in Q4,” said AltaVista in a recent note.
Investors looking for ETFs tracking sector with solid earnings can turn to the Consumer Discretionary SPDR (ETF)(NYSE:
XLY), but there is some caution necessary here. The consumer
discretionary sector posted year-over-year earnings growth of more than 11 percent, but much of that growth is attributable to
Amazon.com, Inc. (NASDAQ: AMZN), XLY's largest
holding.
AltaVista rates XLY underweight due in part to recently slack
earnings contributions from the likes of Nike Inc (NYSE: NKE) and Walt Disney Co(NYSE: DIS).
The healthcare sector has seen year-on-year earnings growth of 5.4 percent, according to AltaVista, though the Health Care
SPDR (ETF) (NYSE: XLV) has been hampered this by election
year rhetoric weighing on biotechnology and pharmaceuticals stocks.
As has been the case for the entire downturn so far, Energy (XLE) was the primary culprit. In Q2, its 79 percent decline in
profits was enough to drag the entire S&P into negative territory. Excluding Energy, the index would likely have posted a small
gain of 0.4 percent. Consumer Discretionary (XLY) was the biggest contributor to profit growth, followed closely by Health Care
(XLV), but they were offset by weaker results from Financials (XLF) and Consumer Staples (XLP),” added AltaVista.
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