After a long holiday season, the U.S. markets are now geared up for the Q4 2014 earnings season with a handful of the S&P 500 companies already started announcing their results. However, unlike the second quarter where we saw a 5% plus growth rate, earnings estimates for the last quarter of 2014 remain quite low.
However, one should note that this sharp slide in estimates is not the result of a fresh deterioration in overall corporate profitability, but is rather a reflection of a steep fall in oil prices over the past few months.
The negative revision in estimates was widespread across sectors with estimates having declined for 13 out of the 16 Zacks sectors. Construction, Utilities and Business Services are the only sectors where estimates have modestly gone up.
Below, we have highlighted three sectors and their respective ETFs that have witnessed downward revisions the most. Investors should clearly avoid these sector ETFs to prevent any severe drop in their portfolio values for the 2014 Q4 earnings season.
However, one should also keep a close eye on management commentary about business conditions given global growth worries. In case there is any favorable change in management commentary or outlook in spite of lackluster earnings from these sectors, traders might consider some bottom fishing in the below mentioned ETFs.
The negative revision was the most prominent for the energy sector, with the sector now expected to report a 20% decline in earnings as against growth of 7% at the start of the quarter. In fact, the Zacks Consensus Estimate for earnings for some of the sector leaders like Exxon (XOM), Chevron (CVX) and ConocoPhillips (COP) have dropped 22.5%, 33.2% and 44.7%, respectively, over the last three months.
If that is the case, energy ETFs might continue to have a tough time going forward. This is especially true as the above three companies combined bring in roughly 45% of the sector’s total earnings.
Also, large oil and gas companies are reducing their capital expenditure plans following a sharp slide in oil prices over the past six months (read: Energy ETFs in Focus as ConocoPhillips (COP) Cuts 2015 Capex).
Though the materials sector was one of the largest contributor to earnings during Q3 2014, the earnings estimates for the materials sector for Q4 have flipped from a growth rate of 22.5% to a decline of 6.1% at present.