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The first-quarter 2023 earnings season will kick off this week, with the banking sector slated to report numbers. The picture of the earnings season seems bleak given that the companies are struggling with a host of challenges, including inflation, rising interest rates, and concern about the health of the financial system in the wake of the two biggest bank failures since the 2008 financial crisis.

Total S&P 500 earnings are expected to be down 10.1% from the same period last year on 1.8% higher revenues, per the latest Earnings Trends. This would follow the 5.4% earnings decline in Q4 2022 on 5.9% higher revenues. Though estimates have come down from the 4% earnings decline projected at the start of the first quarter, the magnitude of negative revision is smaller relative to the comparable periods for the preceding two quarters.

Of the 16 Zacks sectors, six are expected to post positive earnings growth in the first quarter, with the strongest gains in Transportation (55.6%). This would be followed by Consumer Discretionary (17.8%), Aerospace (14.9%), Energy (4.7%), Industrial Products (1.2%), and Finance (0.8%).

Analysts expect companies in the S&P 500 to report a second consecutive decline in quarterly earnings. First-quarter profits are projected to drop 6.8% from the same period a year earlier, according to FactSet. That would mark the steepest earnings decline since the second quarter of 2020 when the onset of the COVID-19 pandemic resulted in a 32% profit contraction.

Given this, we have highlighted one ETF from the above-mentioned five sectors that could make great plays as the earnings season unfolds. These ETFs have a favorable Zacks ETF Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Transportation

The transport sector has been performing quite well this year as its profitability picture has notably improved. iShares U.S. Transportation ETF (IYT - Free Report) seems a good pick. It tracks the S&P Transportation Select Industry FMC Capped Index, giving investors exposure to a small basket of 47 securities. From a sector perspective, air freight & logistics and rail transportation take the largest share at nearly 32.3% and 26.7%, respectively.

iShares U.S. Transportation ETF has accumulated $761.7 million in its asset base and sees a solid trading volume of around 190,000 shares a day. It charges 39 bps in annual fees and has a Zacks Rank #2 with a High risk outlook.

Consumer Discretionary

Americans are in good shape with higher spending and rising confidence, indicating a resilient economy. Rising spending bodes well for the consumer discretionary sector. Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) is the largest and most-popular product in this space, with AUM of $14 billion and an average daily volume of around 6 million shares.
It offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index.

Consumer Discretionary Select Sector SPDR Fund holds 53 securities in its basket, with key holdings in Broadline Retail, Specialty Retail, Hotels, Restaurants & Leisure, and Automobiles with a double-digit allocation each. Consumer Discretionary Select Sector SPDR Fund charges 0.10% in expense ratio and has a Zacks ETF Rank #1 with a Medium risk outlook.

Aerospace

The ongoing Russia-Ukraine issues and geopolitical tensions in some other countries are driving defense spending higher. Additionally, the aerospace and defense sector has shown its resiliency to the recent market volatility, which is expected to prevail in the coming days. iShares U.S. Aerospace & Defense ETF (ITA - Free Report) seems a good pick. It provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. iShares U.S. Aerospace & Defense ETF holds 35 stocks in its basket with AUM of $5.8 billion and an expense ratio of 0.39%.

iShares U.S. Aerospace & Defense ETF trades in an average daily volume of around 661,000 shares. It has a Zacks ETF Rank #3 with a Medium risk outlook.

Energy

The energy sector has benefited from tight supply conditions amid rising interest rates and recession fears. Energy Select Sector SPDR (XLE - Free Report) is the largest and the most popular ETF in the energy space, with AUM of $40.4 billion and an average daily volume of 21 million shares. It offers exposure to the broad energy space and follows the Energy Select Sector Index. Energy Select Sector SPDR holds 23 securities in its basket, with a heavy concentration on the top two firms.

Energy Select Sector SPDR charges 10 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook.

Industrials

The industrials sector is set to benefit as business conditions remain good, and demand seems to be solid. Growing employment in the manufacturing sector calls for strength. First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - Free Report), with a Zacks ETF Rank #2 and a Medium risk outlook, looks like an exciting pick.

First Trust Industrials/Producer Durables AlphaDEX Fund tracks the StrataQuant Industrials Index and offers exposure to 129 U.S. companies. It has spread out exposure to various industries like Industrial Support Services, Industrial Transportation, General Industrials, Construction and Materials, and Aerospace and Defense. First Trust Industrials/Producer Durables AlphaDEX Fund has an AUM of $1.5 billion and an average daily volume of around 149,000 shares. It charges 61 bps in annual fees.

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