Ahrvo Weekly Sector Rankings: 4/27/2020

2020年5月4日

With another week of earnings in the books, investors are starting to get a better idea of the impact that coronavirus is having on S&P 500 companies. It’s not pretty. For Q1 2020, the S&P 500’s earnings decline accelerated from -14.5% last week to -15.8% (worst since Q3 2009). The fall in earnings can be attributed to cyclical sectors- materials (down 25%), industrials (down 31%), financials (down 42%), consumer discretionary (down 42%), and energy (down 67%) sectors. Defensive sectors- utilities (up 4%), consumer staples (up 4%), health care (up 3%), and technology (up 1%) have faired much better. Of the 122 companies that have reported results, 60% reported both positive earnings and revenue surprises. However, it’s worth mentioning that analyst expectations were down 10% on average in March, so companies beating expectations are jumping over a lower hurdle.

Over the last week, the S&P 500 continued to climb higher, up ~4%. Media outlets have attributed the positive price movement to a possible coronavirus vaccine. The upward movement in price, coupled with decreasing earnings has caused the price-to-earnings ratio (valuation) of the S&P to become expensive relative to historical averages. Making buying stocks expensive at a time when economic uncertainty is at an all-time high. The forward P/E on the S&P 500 is 19.1x, higher than the 5 and 10 year average of 16.7x and 15x, and up from 14x in early March. As an example of the uncertainty facing company executives (and as a result, the investors/traders), only 50 of the 122 companies that have reported results mentioned EPS guidance for Q2 in their earnings presentations. Of the 50 companies, 30 mentioned they were no longer certain of their EPS guidance (forecast) for the year, with all 30 citing coronavirus as the primary reason. Out of the other 20 companies that provided guidance, 10 issued EPS guidance that was lower than previous expectations.

Over the last week, all but one (utilities) sector experienced an increase in price. In typical “risk-on” fashion, all cyclical sectors outperformed. Energy (ticker: XLE) led the way, up 9.6%. While financials (ticker: XLF), materials (ticker: XLB), industrials (ticker: XLI), and consumer discretionary (ticker: XLY) returned 6.7%, 6.5%, 4.9%, and 5.1%, respectively. Technology (ticker: XLK) was the only “defensive” sector to outperform, up 5.2%. Utilities (ticker: XLU), healthcare (ticker: XLV), consumer staples (ticker: XLP) returned -.28%,.77%, and .52% respectively. It’s worth noting that sector performance (rotation) was a complete reversal from last week when defensive sectors outperformed cyclicals and the market.

As the S&P 500 climbs toward the 3,000 price level, investors need to ask themselves whether the house being built is sitting on solid foundation. The market is trading on the positive news when the reality on the ground is much different- 30 million Americans unemployed over the last 6 weeks. The infusion of liquidity by the Federal Reserve and the U.S. government has helped to prop up asset prices. However, ask yourself this question. Why are investors buying into the market at a time when stocks are expensive, economic uncertainty is high, and company executives aren’t even able to articulate what they expect their companies to do over the next 3 to 6 months? It is a recipe for disaster. Although I remain net-long, I don’t plan on adding new capital to stocks until the market pulls back and valuations become reasonable (14x-16x earnings). As the high from stimulus begins to fade, that opportunity will present.

-Appo Agbamu, CFA

Ahrvo Score (Overall Score)

1)Technology (⬆️1 spot)
2)Utilities (⬇️1 spot)
3)Industrials (⬆️1 spot)
4)Consumer Staples (⬇️1 spot)
5)Consumer Discretionary (no change)
6)Financials (no change)
7)Basic Materials (no change)
8)Health Care (no change)
9)Energy (no change)

Momentum Score

1)Healthcare (⬆️1 spot)
2)Technology (⬇️1 spot)
3)Basic Materials (⬆️2 spots)
4)Consumer Staples (no change)
5)Utilities (⬇️4 spots)
6)Industrials (no change)
7)Consumer Discretionary (no change)
8)Financials (no change)
9)Energy (no change)

Growth Score

1)Financials (no change)
2)Industrials (no change)
3)Technology (no change)
4)Consumer Discretionary (no change)
5)Consumer Staples (no change)
6)Utilities (no change)
7)Health Care (no change)
8)Basic Materials (no change)
9)Energy (no change)

Quality Score

1)Consumer Discretionary (no change)
2)Industrials (⬆️1 spot)
3)Consumer Staples (⬇️1 spot)
4)Technology (no change)
5)Utilities (no change)
6)Energy (⬆️1 spot)
7)Financials (⬇️1 spot)
8)Basic Materials (no change)
9)Health Care (no change)


Value Score

1)Industrials (no change)
2)Consumer Discretionary (no change)
3)Financials (no change)
4)Utilities (no change)
5)Energy (no change)
6)Consumer Staples (no change)
7)Basic Materials (no change)
8)Technology (no change)
9)Health Care (no change)


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