submitted by Ryan Lewenza, TD Wealth (Portfolio Advice and Investment Research)
With Q2/13 U.S. earnings season nearly over, we wanted to provide a recap of the quarter, and highlight the key trends that have emerged during this quarter. As well we are making one change to our U.S. sector strategy, by upgrading U.S. financials to overweight. Finally, with interest rates on the rise we wanted to contrast our current sector recommendations with historical sector returns during previous periods of rising interest rates. Highlights of today’s U.S. strategy report include:
· Overall, we give the Q2/13 earnings season a B rating, as results have generally beat lowered expectations. Of the 450 companies that have reported results, 324 (72%) reported earnings above analyst expectations. S&P 500 operating earnings are likely to come in around $26.50, which would mark a new quarterly high for the index and equate to Y/Y growth of 4.3%. Helping to drive the better-than-expected results were the financials and consumer discretionary sectors, which posted Y/Y growth of 28% and 11%, respectively.
· Top-line results were a challenge in the quarter, which should not be a surprise given slowing global growth seen for much of H1/13. Sales grew at 2.4% in the quarter, which was down from 8% in Q1/13. 56% of companies in the S&P 500 beat sales estimates, which is well below the long-term average beat rate of 62%.
· Corporate managers continue to be guarded in their outlooks, with 56 companies in the S&P 500 providing negative pre-announcements for Q3/13 quarterly results, versus 15 companies providing positive pre-announcements, according to Thomson Reuters.
· On February 14, 2013, we upgraded U.S. financials to marketweight, given improving fundamentals for the sector. With these supportive trends continuing, we are upgrading the sector to overweight. Our more constructive view of the sector is predicated on: 1) strong earnings, 2) improving fundamentals, 3) attractive valuations, and 4) strong technical trends.
· With interest rates on the rise we analyzed historical sector returns during previous periods of rising interest rates. As expected, the interest-sensitive sectors underperformed, with the utilities and telecommunications sectors posting weak relative returns. This supports are underweight position in these sectors. The strongest and most consistent outperformer was the information technology sector, which was the best performing sector in five of the six periods of rising interest rates. We remain overweight the sector. Consumer discretionary and materials at times outperform, however we remain underweight these sectors. Industrials generally outperformed the broader market, and we continue to recommend an overweight in the sector.
U.S. Equity Strategy (Q213 Earnings Recap and U.S. Sector Update) - August 16 2013
