Forget Earnings Slowdown, Bet On Revenue-Weighted ETFs

The Q4 reporting cycle has started on a weak note with deceleration in earnings growth. This is especially true as earnings from the 77 S&P 500 members that have reported Q4 results so far are up just 14.2%, much lower than Q3 growth of 19.3% and also below the pace set in the first three quarters of the year. Earnings surprise of 70.1% is also tracking below the historical periods. In fact, the Q4 EPS beat percentage is the lowest since Q4 2016.

However, revenue trends seem encouraging with revenue growth of 8.1% for the S&P 500 companies that have reported so far. In fact, it is in line with Q3 growth and is tracking the elevated pace of the last few quarters. Revenue beat of 62.3% is also above the previous reporting cycle and is moving toward recent quarterly trend rates (read: Top ETF Trends for 2019).

Further, revenue growth is expected to outpace earnings growth this year. This trend can easily be depicted from the below chart:

Against such a backdrop, revenue-weighted ETFs are expected to take lead over earnings-weighted strategies, and could be potential outperformers this reporting cycle and the next.

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