S&P 500   3,768.25
DOW   30,814.26
QQQ   311.86
S&P 500   3,768.25
DOW   30,814.26
QQQ   311.86
S&P 500   3,768.25
DOW   30,814.26
QQQ   311.86
S&P 500   3,768.25
DOW   30,814.26
QQQ   311.86
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The Top Two Sectors For The Q4 Earnings Season

Monday, November 30, 2020 | Thomas Hughes
It’s Time To Get Ready For Q4 Earnings

With the 3rd quarter earnings season all but over it is time to look at what to expect from the next cycle. If the Q3 results are any indication, and I think they are, what investors need to expect is this: the consensus outlook for the 4th quarter is still too low. The difference between the S&P 500 (NYSEARCA:SPY) consensus estimate at the start of the Q3 season and the final result is close to 1800 basis points. That compares to about a 1400 basis point difference in the 1st quarter.

So far, the consensus for Q4 has risen only 200 basis points from a low of -12.7% to the current -10.6%. That leaves quite a bit of upswing and based on the data, revenue earnings are accelerating so the difference could be much larger. The takeaway is the earnings rebound is strong, the trajectory of growth is up, the outlook for Q4 is too low, and there is a very great chance that Q4 earnings growth will be positive. All reasons to think the S&P 500 will go higher. The caveat is that not all sectors will see the same growth. The Energy Sector, for one, is still looking at a near triple-digit decline in YOY earnings and that figure is getting worse, not better.

Consumer Discretionary Is A Rock-Star

The Consumer Discretionary Sector (NYSE:XLY) is not one you think of, at least not me, when I am thinking about an economy on the rocks. The pandemic sparked a massive downgrade of the sector that, it turns out, was very very wrong. Not only was the U.S. consumer in good shape before the pandemic started but the economic stimulus and economic rebound have supported robust spending in this area. Looking at the 3Q numbers, the consensus estimate at the beginning of the quarter was a full 3200 basis points below the reality. Looking at the 4th quarter consensus, the average estimate has only improved by 180 basis points suggesting the analysts are far behind the curve.

The Top Two Sectors For The Q4 Earnings Season

The top two holdings in the XLY Consumer Discretionary SPDR are Amazon (NASDAQ:AMZN) and Home Depot (NYSE:HD) and they account for more than 30%. Both companies have reported robust upticks in YOY revenue and earnings due to the pandemic and those trends are not expected to wane. Regarding Amazon, it is the go-to source for eCommerce and that industry is booming. Amazon, itself, has sustained YOY revenue growth in the range of 40% while others are reporting triple-digit eCommerce gains. As for Home Depot, the pandemic is supporting a secular shift to at-home living that can also be seen in the housing data.

Looking at the chart of weekly prices it is clear the XLY is in a strong rebound. The ETF not only rebound in a Vee-bottom but it moved up to set new all-time highs after the correction. Now, the ETF appears to be a little overextended and in need of a sell-off. The indicators are still technically bullish but show major divergence. I wouldn’t expect the market to reverse but I would expect to see it sell-off. When it does I would target the $150 and $140 levels as potential entry points.

The Health Care Sector Is Growing The Fastest

The Health Care sector (NYSEARCA:XLV) is another surprising winner from the Q3 reporting season. The Health Care sector finished the quarter with the highest rate of YOY growth of all 11 S&P 500 sectors. The final tally was just shy of 13.0% YOY EPS growth or a 1350 basis point improvement over the consensus estimate. Looking forward, the sector is expected to lead in the 4th quarter as well. The current consensus is near 4.5% and has been holding steady despite the strong 3Q showing. On an industry basis, all 6 sub-industries are growing and should contribute to positive results in the 4th quarter. Assuming the 3Q performance is repeated, EPS growth for this sector could reach the 17%-to-20% range.

The Health Care sector made a solid rebound from the March lows just like the Consumer Discretionary Sector but not quite as robust. The XLV Health Care Sector SPDR peaked out near 9.0% above its pre-COVID all-time high where the XLY is up closer to 20%. Another difference is that the XLV has already begun to pull back from its peak and hinting at a buy signal. The ETF is bouncing from potentially strong support at $108 with mixed indicators. The indicators are mixed but consistent with consolidation and support at this level. The biggest risk, technically speaking, is the stochastic indicator. Stochastic is showing a weak bearish crossover that may lead the price action lower. In that scenario, the 30-bar EMA is the next target for support.

The Top Two Sectors For The Q4 Earnings Season

7 Semiconductor Stocks to Power Your Portfolio

Semiconductor stocks are thought of as cyclical stocks. However as technology continues to evolve, the cycles for semiconductors have become almost indiscernible. And for the last 18 months, semiconductor stocks have been some of the most volatile stocks.

But the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up nearly 17% (16.8%) in 2020. That far outpaces the S&P 500. And this is on the heels of 2019 when the normally “boring” index surged over 60%.

What are the catalysts for semiconductor stocks? At this point, the better question may be what isn’t a catalyst for this group. The 5G buildout looks to finally be underway despite the pandemic. Data centers keep on growing, new gaming consoles will be out later this year, and work from anywhere will continue to be the reality for many Americans.

Each of these segments will define the semiconductor industry for at least the rest of this year. And are likely to continue to dominate our national conversation long after the pandemic is over. But those aren’t the only catalysts. Online learning is going to increase in importance. And that means students will need the laptops and tablets that are capable of handling the speed and processing power needed for remote learning. And there’s still time for you to profit from this growing sector. In this presentation, we’ve identified seven of the best semiconductor stocks that still offer good growth opportunities.

View the "7 Semiconductor Stocks to Power Your Portfolio".

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