Why Counter-Cyclical Is Outperforming Cyclical Sector

Extraordinary Rally, Stagnant EPS Estimates

The S&P 500 has been on an amazing run as it has increased 20.5% since the Christmas Eve bottom. It is up 1.74% in March and 13.01% year to date. This is the best first quarter since 1998. This has been a global rally as every country ETF except Qatar is up in 2019. The average country return as of March 15th is 11%; that is the highest average since 1987. The S&P 500 is 3.34% off its record closing high in September.

As you can see from the table below, The Earnings Scout shows Q1 EPS is expected to fall 0.5%. Traders are paying up for declining earnings.

To be fair, when stocks cratered in Q4, they were falling as earnings were growing. It appears the rally in January and February was about the market correcting itself as it mistakenly priced in a recession in December. Even though the numbers don’t look great, since the beginning of March, the estimate decline has slowed. That has helped stocks.

The table shows Q1 growth estimates from March 1st to March 18th only fell 0.6%. Part of the reason estimates haven’t fallen much is because earnings season is over. There aren’t many firms issuing terrible guidance to catalyze negative estimate revisions. As we’ve mentioned previously, even though FactSet shows lower EPS growth estimates, it still shows revenue growth will be in the mid-single digits in Q1. The Earnings Scout doesn’t see an earnings recession as EPS growth is expected to be in the low single digits in Q2 and Q3. Those estimates will be strongly affected by guidance from Q1 earnings season.  

Utilities Ramping

The chart below shows the ratio of the cyclicals divided by the defensives is underperforming the S&P 500. To be clear, the cyclicals are consumer discretionary and the utilities are defensives.

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