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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 Aug 23, 2023, 96% of the S&P 500 companies have reported so far with 79.4% earnings beat ratio and 65.4% revenue beat ratio. This translated into a blended beat ratio of 55.2%.
All of the S&P 500 aerospace companies reported, of which 100% beat on earnings and revenues. Earnings growth was a decline of 1.6% while revenue growth was 11.7%.
About 89.5% of the S&P 500 companies reported, of which 82.4% beat on earnings and 79.4% beat on revenues. Both produced a blended beat ratio of 66.2%. Earnings growth was a decline of 1% on 0.3% increase in revenues.
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 76.9% beat on revenues. Both produced a blended beat ratio of 69.2%. There is a 10.5% decline in earnings on 4.5% growth in revenues.
Auto – First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report)
All companies under the S&P 500 reported, of which 87.5% beat on earnings and revenues. Both translated into blended beat ratio of 75%. Earnings growth was 25.1% in Q2 on 22.6% increase in revenues.
Medical – Health Care Select Sector SPDR ETF (XLV - Free Report)
About 96.6% of the S&P 500 companies reported, of which 87.5% beat on earnings and 85.7% beat on revenues. Both produced a blended beat ratio of 78.6%. There is 29.7% decline in earnings and 5.7% growth of revenues in Q2.
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5 Sector ETFs Win on Q2 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 Aug 23, 2023, 96% of the S&P 500 companies have reported so far with 79.4% earnings beat ratio and 65.4% revenue beat ratio. This translated into a blended beat ratio of 55.2%.
Sector ETFs in Focus
Aerospace – iShares U.S. Aerospace & Defense ETF (ITA - Free Report)
All of the S&P 500 aerospace companies reported, of which 100% beat on earnings and revenues. Earnings growth was a decline of 1.6% while revenue growth was 11.7%.
Technology – Technology Select Sector SPDR ETF (XLK - Free Report)
About 89.5% of the S&P 500 companies reported, of which 82.4% beat on earnings and 79.4% beat on revenues. Both produced a blended beat ratio of 66.2%. Earnings growth was a decline of 1% on 0.3% increase in revenues.
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 76.9% beat on revenues. Both produced a blended beat ratio of 69.2%. There is a 10.5% decline in earnings on 4.5% growth in revenues.
Auto – First Trust S-Network Future Vehicles & Technology ETF (CARZ - Free Report)
All companies under the S&P 500 reported, of which 87.5% beat on earnings and revenues. Both translated into blended beat ratio of 75%. Earnings growth was 25.1% in Q2 on 22.6% increase in revenues.
Medical – Health Care Select Sector SPDR ETF (XLV - Free Report)
About 96.6% of the S&P 500 companies reported, of which 87.5% beat on earnings and 85.7% beat on revenues. Both produced a blended beat ratio of 78.6%. There is 29.7% decline in earnings and 5.7% growth of revenues in Q2.