Spotting Sector Trends: Sector Opportunities for Q3 2022

By:

Head of SPDR Americas Research

  • Insurance firms may provide a defensive rate-sensitive solution to navigate elevated volatility and higher rates
  • Real Estate firms’ improving earnings sentiment may offer durability ahead of the next earnings season
  • Semiconductors may offer long-term growth at a more reasonable price now, given no downside revisions to growth forecasts

Global equities are in a bear market and recession warnings are growing louder. Broad-based asset class volatility remains elevated, and the S&P 500® Index has posted a daily gain or loss greater than +/-1% on more than 60 days in 2022. Outside of 2020, we haven’t seen so many of these kinds of outsized moves since 1956.1

In addition to the macro forces pressuring markets, fundamental volatility is likely to become more apparent — especially during the early summer months, when earnings season kicks off. That’s when firms will report out on how they are responding to margin compression from inflationary pressure and the impact of a slowing economic growth environment, as well as offer forward guidance on future capital expenditures/growth plans.

In light of ongoing volatility amid rising rates, it may be beneficial to focus on the following:

  • Insurance — a defensive industry with a positive relationship to movements in rates.
  • Real Estate — an industry with positive earnings sentiment may be better able to withstand potential fundamental volatility in the months ahead.
  • Semiconductors — a potential high-growth bargain given the drawdown in stocks, backed by secular long-term tailwinds.

Consider Defensive Rate-Sensitive Industries as Rates Move Higher

Rising short- and long-term rates have been a driving force of market sentiment, putting significant downside pressure on risk assets this spring. The ensuing volatility has led to a reduction in growth projections and an increase in recession fears.

The rise in rates has also weighed on fixed income exposures, as broad core bonds are down double digits in 2022.2 And if we look to bond fund flows (+$37 billion into ultra-short government bond ETFs this year),3 it is clear that investors have sought out market exposures to mitigate the negative impact of the rise in rates on bond portfolios.

Rate-sensitive equity allocations are not as apparent, however; a signal that investors have not taken a full portfolio view when it comes to positioning defensively. This is supported by financial sector equity ETFs, the most rate-sensitive sector, posting $12 billion of outflows in 2022.4

While the average financial sector stock is down 13% this year,5 not all subcomponents have seen the same magnitude of price drop. Based on GICS level three industry groupings, capital markets and banks stocks fell 15%, on average, this year.6 Meanwhile, insurance firms are only down an average 5% — well above returns for the broader sector and market.7

While return trends differ among financials this year, the sector’s long-term sensitivity to interest rates has not changed. And for insurance firms, their positive sensitivity to interest rates comes with a lower overall standard deviation of returns, as shown below. As a result, insurance is likely a more defensive rate-sensitive industry allocation than other subcomponents of the financial sector.

Insurance Firms Show Positive Rate Sensitivity and Lower Overall Volatility

Insurance Firms Show Positive Rate Sensitivity and Lower Overall Volatility

The financial sector is likely to post double-digit declines in earnings growth for 2022, given some hard year-over-year comparable figures. But the earnings profile of insurance firms has been stronger than other financial industries. In Q1, insurance firms posted a decline in growth of just -3% compared to -21% for the entire financial sector.8 And 75% of insurance firms surprised to the upside at an average 7.5% rate, compared to 70% of firms at an average 6% rate for the broader sector.9

Expectations for insurance firms’ future growth have also been more stable — full-year 2022 earnings-per-share forecasts have modestly increased on the year (+0.37%), while forecasts for the broader sector have declined by 2%.10 This is a result of banks’ and capital markets’ expectations for slower overall economic growth and declining markets.

Focus On Sectors With Positive Earnings Sentiment

Fundamental volatility and uncertainty have impacted market sentiment over the last quarter, and that trend is likely to continue. Analyst upgrades-to-downgrades reflect this new, uneven fundamental environment. The number of analysts upgrading 2022 earnings-per-share (EPS) estimates is essentially equivalent to the number of downgrades for US firms. And this ratio has been declining monotonically over the past six months.11

Analysts are not the only ones downgrading expectations — firm guidance has been weaker too. Following the most recent quarter results, more than 70% of S&P 500 firms have issued negative guidance.12 This is above the 60% historic average. As a result, earnings expectations for the second quarter have declined from 5.9% to 4.3%.13

Amid weaker sentiment, firms that were unable to beat lowered estimates were punished more than usual in Q1 — falling 5.1% the day after releasing results compared to the 2.3% five-year average one-day decline.14 This trend underscores the rise of fundamental-led volatility and the need to mitigate this non-macro-related risk moving markets now.

For these reasons, ahead of the next earnings season, it may be beneficial to focus on sectors with positive earnings sentiment. Real estate ranks high on earnings sentiment based on recent analyst upgrades, both in the size and number of upgrades, for 2022 full-year figures.

Sector Earnings Sentiment Scorecard

Sector Earnings Sentiment Scorecard

Click here to read the full article

Footnotes

1 Bloomberg Finance, L.P., as of June 28, 2022, based on SPDR Americas Research calculations.
2 Bloomberg Finance, L.P., as of June 28, 2022, based on the return of the Bloomberg US Aggregate Bond Index.
3 Bloomberg Finance, L.P., as of June 28, 2022, based on SPDR Americas Research calculations of flows into US-listed ETFs.
4 Bloomberg Finance, L.P., as of June 28, 2022, based on SPDR Americas Research calculations of flows into US-listed ETFs.
5 Bloomberg Finance, L.P., as of June 28, 2022, based on the average stock return in the S&P Supercomposite Financial Sector Index.
6 Bloomberg Finance, L.P., as of June 28, 2022, based on the average stock return in the S&P Supercomposite Financial Sector Index per their GICS Industry group.
7 Bloomberg Finance, L.P., as of June 28, 2022, based on the average stock return in the S&P Supercomposite Financial Sector Index per their GICS Industry group.
8 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Financial Sector Index.
9 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Financial Sector Index.
10 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Financial Sector Index.
11 FactSet, as of June 28, 2022, based on firms in the S&P 500 Index.
12 FactSet, as of June 28, 2022, based on firms in the S&P 500 Index.
13 FactSet, as of June 28, 2022, based on firms in the S&P 500 Index.
14 FactSet, as of June 28, 2022, based on firms in the S&P 500 Index.
15 FactSet, as of June 28, 2022, based on firms in the real estate sector within the S&P 500 Index.
16 FactSet, as of June 28, 2022, based on firms in the real estate sector within the S&P 500 Index.
17 FactSet, as of June 28, 2022, based on firms in the real estate sector within the S&P 500 Index.
18 FactSet, as of June 28, 2022, based on firms in the real estate sector within the S&P 500 Index.
19 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the S&P 500 Index.
20 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the S&P 500 Index.
21 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the S&P 500 Index.
22 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index.
23 The six fundamental metrics are Price-to-Earnings Ratio, Price-to-Next-Twelve-Months Ratio, Price-to-Sales Ratio, Price-to-Cash Flow Ratio, Price-to-Book Ratio, and Enterprise Value-to-EBITDA Ratio.
24 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index, the S&P 500 Index, and the S&P Information Technology Sector Index.
25 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index, the S&P 500 Index, and the S&P Information Technology Sector Index.
26 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index, the S&P 500 Index, and the S&P Information Technology Sector Index.
27 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index, and the S&P Information Technology Sector Index.
28 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index and the S&P Information Technology Sector Index.
29 Bloomberg Finance, L.P., as of June 28, 2022, based on firms in the financial sector within the S&P Supercomposite Semiconductor GICS Level 2 Sector Index, the S&P 500 Index, and the S&P Information Technology Sector Index.
30 “The Software Defined Vehicle,” Barclays, June 23, 2022.
31 “The Software Defined Vehicle,” Barclays, June 23, 2022.Glossary

Glossary

Earnings Per Share (EPS)
A profitability measure that is calculated by dividing a company’s net income by the number of shares outstanding.

Global Industry Classification Standard (GICS)
The Global Industry Classification Standard (GICS) is a method for assigning companies to a specific economic sector and industry group that best defines its business operations.

Price-to-Earnings Ratio (P/E Ratio)
A valuation metric that uses the ratio of the company’s current stock price versus its earnings per share.

S&P 500 Index
The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

S&P 500 Financial Sector Index
The S&P 500 Financial Sector Index is the GICS Level 1 sector index of stocks within the sector in the S&P 500 Index.

S&P 500 Information Technology Sector Index
The S&P 500 Information Technology Sector Index is the GICS Level 1 sector index of stocks within the sector in the S&P 500 Index.

S&P Supercomposite Financial Sector Index
The S&P Supercomposite Financial Sector Index is the GICS Level 1 sector index of stocks within the sector in the S&P Supercomposite Index

S&P Supercomposite Technology Sector Index
The S&P Supercomposite Technology Sector Index is the GICS Level 1 sector index of stocks within the sector in the S&P Supercomposite Index

S&P Supercomposite Semicondutor GICS Level 2 Index
The S&P Supercomposite Semiconductor Index is the GICS Level 2 sector index of stocks within the sector in the S&P Supercomposite Index  

Originally Posted July 7, 2022 – Spotting Sector Trends: Sector Opportunities for Q3 2022

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