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It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high quality in nature.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks that Can Beat?
Now, finding stocks that have the potential to beat on the bottom line may be investors’ dream but not an easy job. One way to do this is to look at the earnings surprise history of the company. In this regard, one can find out which sectors delivered the highest beat ratio in the ongoing earnings season and play those winning ones.
Per Earnings Trends issued on May 10, 2023, 90.2% of the S&P 500 companies have reported so far with 76.9% earnings beat ratio and 74.9% revenue beat ratio. This translated into a blended beat ratio of 62.3%.
About 80% of the S&P 500 companies reported, of which 81.7% beat on earnings and 83.3% beat on revenues. Both produced a blended beat ratio of 70%.
Construction – iShares U.S. Infrastructure ETF (IFRA - Free Report)
All companies under the S&P 500 reported, of which 92.3% beat on earnings and 84.6% beat on revenues. Both produced a blended beat ratio of 76.9%.
Auto – First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report)
All companies under the S&P 500 reported, of which 75% beat on earnings and 75% beat on revenues. Both translated into blended beat ratio of 75%.
Medical – Health Care Select Sector SPDR ETF (XLV - Free Report)
About 89.7% of the S&P 500 companies reported, of which 82.7% beat on earnings and 82.7% beat on revenues. Both produced a blended beat ratio of 73.1%.
Image: Bigstock
5 Sector ETFs Win on Q1 Earnings Beat
It is not surprising that before an earnings season, every investor looks for stocks that can beat market expectations. This is because investors always try to position themselves ahead of time and look to tap stocks that are high quality in nature.
Why Is a Positive Earnings Surprise So Important?
Historically, stocks of companies with solid quarterly earnings (on a nominal basis) tank if they miss or merely meet market expectations. After all, a 20% earnings rise (though apparently looks good) doesn’t tell you if earnings growth has been exhibiting a decelerating trend.
Also, seasonal fluctuations come into play sometimes. If a company’s Q1 is seasonally weak and Q4 strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.
On the other hand, after much brainstorming and analysis of companies’ financials and initiatives, Wall Street analysts project earnings of companies. They in fact club their insights and a company’s guidance when deriving an earnings estimate.
Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as the market perception. And if the margin of earnings surprise is big, it typically drives the stock higher right after the release. Thus, more than anything else, an earnings surprise can push a stock higher.
How to Find Stocks that Can Beat?
Now, finding stocks that have the potential to beat on the bottom line may be investors’ dream but not an easy job. One way to do this is to look at the earnings surprise history of the company. In this regard, one can find out which sectors delivered the highest beat ratio in the ongoing earnings season and play those winning ones.
Per Earnings Trends issued on May 10, 2023, 90.2% of the S&P 500 companies have reported so far with 76.9% earnings beat ratio and 74.9% revenue beat ratio. This translated into a blended beat ratio of 62.3%.
Technology – Technology Select Sector SPDR ETF (XLK - Free Report)
About 80% of the S&P 500 companies reported, of which 81.7% beat on earnings and 83.3% beat on revenues. Both produced a blended beat ratio of 70%.
Construction – iShares U.S. Infrastructure ETF (IFRA - Free Report)
All companies under the S&P 500 reported, of which 92.3% beat on earnings and 84.6% beat on revenues. Both produced a blended beat ratio of 76.9%.
Auto – First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report)
All companies under the S&P 500 reported, of which 75% beat on earnings and 75% beat on revenues. Both translated into blended beat ratio of 75%.
Medical – Health Care Select Sector SPDR ETF (XLV - Free Report)
About 89.7% of the S&P 500 companies reported, of which 82.7% beat on earnings and 82.7% beat on revenues. Both produced a blended beat ratio of 73.1%.
Consumer Staples – Consumer Staples Select Sector SPDR ETF (XLP - Free Report)
About 87.5% of the S&P 500 companies reported, of which 78.6% beat on earnings and 85.7% beat on revenues. Both yielded a blended beat ratio of 71.4%.