Ahead of the first-quarter earnings season, the S&P 500’s energy (NYSEARCA:XLE), technology (NYSEARCA:XLK) and communication services (NYSEARCA:XLC) sectors were the best-rated by Seeking Alpha’s Quant system.
The Quant Ratings system assigns ratings based on quantitative measures such as valuation, revenue growth, recent stock price movement, etc. The maximum score for an individual company is 5.
The Energy Select Sector SPDR ETF (XLE) topped the list with a Buy recommendation rating and a score of 4.45, followed by Technology (XLK) with a 4.43 and Communication Services (XLC) with a 4.27, both with Buy recommendations.
The energy sector has seen impressive growth so far this year, recording a 15.7% increase, with the Energy Index (SP500-1010) up 16.4%. This growth has been supported by the Federal Reserve’s easing of interest rates, improving demand in China, and the prospect of AI contributing to energy demand.
In the energy sector, Kinder Morgan (KMI) took the top spot with a score of 4.28 out of 5, followed by Diamondback Energy (FANG) at 4.26, both boosted by strong demand trends seen in recent quarterly earnings.
The Technology sector (XLE) ranked second, posting growth of about 7% in the first quarter, buoyed by structural drivers such as the semiconductor and semiconductor equipment industry, as well as artificial intelligence. Supermicrocomputer (SMCI) and Oracle (ORCL) were the highest-rated in the sector, with quant scores of 4.99 and 4.87, respectively.
Other sector ETFs including Materials Select Sector SPDR Fund ETF (XLB), Financial Select Sector SPDR Fund ETF (XLF) and Industrial Select Sector SPDR Fund ETF (XLI) are also rated Buys on the SA Quant system with scores of 3.90, 4.15 and 4.18, respectively.
Lowest Ranking Sector
Real Estate (NYSEARCA:XLRE) and Consumer Staples (NYSEARCA:XLP) were at the bottom of the S&P 500 sector list at the end of the first quarter with scores of 1.74 and 2.86, respectively. Real Estate was the only sector rated a Sell by SA’s Quant system.
The Real Estate Select Sector SPDR Fund ETF (XLRE) fell about 6% in the first quarter as the market diluted expectations of a near-term rate cut. Analysts at Citi Research believe fundamentals will continue to face challenges in 2024. Boston Properties (BXP), Kimco Realty (KIM), and Equinix (EQIX) have been notable laggards among the S&P 500 index components.
Consumer discretionary goods (XLY) performance was hampered by homebuilding and autos, which continued to struggle in the first quarter. Top decliners in the sector in Q1 were Tesla (TSLA) -33%, Lululemon Athletica (LULU) -23%, VF Corporation (VFC) -18%, Etsy (ETSY) -16%, and Nike (NKE) -13%.
S&P 500 Q1 Earnings Insights:
The first-quarter earnings season kicked off today with several major banks reporting their latest quarterly results. BlackRock (BLK), Wells Fargo (WFC), Citigroup (C), and JPMorgan Chase (JPM) all reported better-than-expected quarterly results.
According to FactSet, the financial sector is expected to post 0.7% profit growth (year-over-year) in the first quarter, the sixth-highest among all 11 sectors.
Goldman Sachs is upbeat on labor market data ahead of earnings season but expressed concern over flat year-over-year sales and EPS growth outlook for S&P 500 companies, projecting just +3%. Weak reports from several retail stocks also raise questions about the state of the U.S. consumer.
Overall, the bank expects communication services (22%), information technology (21%), consumer discretionary (14%) and utilities (+23%) to post strong growth in the first quarter. Energy (-27%) and materials (-24%) are expected to see the largest declines.
