First-quarter earnings have been a source of anxiety for investors in recent weeks, after analysts slashed forecasts the most since 2009, but profit-reporting season didn’t turn out to be as much of a disappointment as many expected.
In fact, for a few sectors, reports turned out to be more upbeat than expected.
What was shaping up to be a dismal earnings season, with profits falling nearly 5 percent according to FactSet estimates — the first year-over-year profit decline since 2012 — is turning out better than expected.
As of the end of last week, 356 companies representing 80 percent of the S&P 500 have posted first-quarter results, and aggregate profits now appear to be on track for a gain of 0.9 percent.
|Earnings for the beaten-down energy sector beat estimates by nearly 20 percent.|
The biggest positive surprises contributing to better-than-expected results are coming from the most beaten-down sector: Energy. Again, according to FactSet’s math, energy stocks in the S&P 500 are beating estimates by a margin of nearly 20 percent. And energy stocks are responding; the sector gained 5 percent over the last month alone!
Keep in mind, the energy sector is still posting an overall decline in profits this quarter, which is why you must be very selective with oil & gas stocks. It’s definitely a stock-picker’s market in the energy patch, as my colleague Mike Larson has been pointing out.
Health care also continues to surprise on the upside with actual profits 10.8 percent above estimates. What’s more, health care is the best performing sector when it comes to overall profit growth, with earnings on track to grow 21.7 percent year over year.
Fast-paced profit growth, especially in biotech, keeps pushing health care stocks higher — up 24 percent over the past 12 months — and leading the pack in performance so far this year too, up 5.4 percent!
The lesson is that you must be more selective as an investor right now, favoring the stocks and sectors that are delivering the best results and superior performance.
With first-quarter earnings almost out of the way, investors can cross that off the list of worries, which is a good thing since there are plenty of additional concerns.
Slumping U.S. economic data, rising market volatility and of course the ongoing Greek drama with the European Central Bank as yet another showdown approaches; these are just a few items on the list of concerns. Here’s another: Stock market seasonality just turned negative.
Sell in May?
My colleague Jon Markman covered this topic on Tuesday, but let me share some additional details with you.
According to the esteemed Stock Trader’s Almanac, May begins the “Worst Six Month” period for the stock market. According to Almanac editor Jeff Hirsch: “after decades of historical research, we discovered that most market gains occur during the months November through April.” Hence the old Wall Street adage: sell in May and go away.
The historical record bears this out:
$10,000 invested in the Dow Jones Industrials ONLY during the favorable months of November-April would have grown to $2,379,501 over the last 65 years.
But the same investment from May-October only, would have posted a loss of $6,500 over the same 65-year period; a striking difference.
So does this mean investors should simply walk away from stocks for the next six months and take an extended vacation instead? Not so fast.
As Hirsch himself admits:”We do not suggest purely going away in May. We do, however, suggest changing your investment posture from aggressive to defensive.”
That’s good advice, especially with market volatility on the rise this year, but there’s more to this story of stock market seasonality.
According to research by Merrill Lynch, the seasonally weak May-October period is back-end loaded. The worst stock market performance typically takes place later in the year. Their findings based on market data going back to 1928:
May-October is indeed the weakest six-month period of the year, with stocks up just 2 percent on average.
This contrasts with an average gain of 5.1 percent from November-April, the best six months.
But if you further sub-divide the six-month periods what you’ll find is the worst performance of the year is actually from August-October, when stocks decline an average of 0.03 percent!
The bottom line: Based on the historical record, seasonality is no longer in the stock market’s favor. And considering elevated market volatility and choppy trading conditions, it is a good time to take note of all your investments, and perhaps grab some gains or tighten your protective stops. But it doesn’t mean you should automatically go to cash until Halloween either.
After all, June-August is the second best three-month period of the year for stocks, according to the data, with an average gain of 3.1 percent!