In the wake of Friday's disappointing jobs report, it is time for financial advisers to start bracing for what could be the worst earnings season in six years.
The consensus estimate is for S&P; 500 Index earnings to decline 3% from a year ago, a grim reality that is being weighed down by an energy sector that is expected to show a 63.4% decline in year-over-year first-quarter earnings.
But the good news is, a few of the 10 index subcategories should come out of the quarter in decent shape.
The financial sector is expected to show an 11% increase over the same quarter last year, health care is supposed to be up 9% and consumer discretionary should be up 7.3%, according to the latest data from S&P; Capital IQ.
Source: S&P; Capital IQ
“The drag from energy is so significant that it's helping to move the overall index earnings into negative territory,” said Todd Rosenbluth, S&P; Capital IQ's director of mutual fund and ETF research.
“It's really all about the drop in crude oil prices, which were almost double where they are today a year ago,” he added. “So, it's not going to be a good picture for earnings in general.”
As usual, earnings season will officially kick off when Alcoa Inc. (AA) reports Wednesday after the stock market closes. But it will take until the middle of June before every company in the index has reported.
With that in mind, there are a few ways to get some easy and diversified exposure to some of the winning categories.
Specifically looking at the financial sector, Mr. Rosenbluth singles out John Hancock Regional Bank Fund (FRBAX) and Davis Financial Fund (RPFGX).
For health care, which continues to benefit from more business related to Obamacare, he recommends BlackRock Health Sciences Opportunities Fund (SHSAX) and Prudential Health Sciences Fund (PHLAX).
For more diversified exposure to the healthiest sectors, Mr. Rosenbluth highlights Invesco Comstock Fund (ACSTX) and John Hancock Disciplined Value Fund (JVLAX), which have significant exposure to large-cap health care, financial and consumer discretionary stocks.
“The more diversified funds are the most appropriate, because you could see earnings turn from one sector to another from quarter to quarter,” Mr. Rosenbluth said.
Meanwhile, there is a school of thought that the earnings estimates might be slightly off the mark, and not as bad as projected, according to Douglas Cote, chief investment strategist at Voya Financial Inc.
He cites consensus analysts' estimates from October that showed, for example, energy-sector earnings improving by 3% in the first quarter.
The financial sector, at the same time, was expected to generate a whopping 19% year-over-year earnings increase.
“Everything looked too optimistic before, and now it's looking way too pessimistic,” Mr. Cote said. “We've gone from extreme exuberance to extreme pessimism, and what I'm thinking is that the S&P; might actually eke out a positive gain for the quarter once all companies have reported.”
Part of what makes Mr. Cote so confident is that the estimates have been missing on the low side for most of the bull market run.
“We know energy will be down, but the overall consensus, having gone from very positive to very negative, is an extreme swing that's over done,” he said. “How many times do earnings have to beat the estimates before we stop relying on the estimates?”