Over the past year, two sectors have noticeably lagged the overall market—healthcare and energy. The S&P 500 is up 16.58% in the last 52 weeks and eight of the 1o main sectors have gained between 15% and 25% while the healthcare sector is up only 8.2% and the energy sector is down 7.8%. The energy sector will see some of its biggest players report earnings later this week and investors will be hoping for similar results to what the healthcare sector has seen in the past few weeks.
Looking at the Healthcare Select Sector SPDR (NYSE: XLV) as a proxy for the sector, the largest holdings of the exchange traded fund are Johnson & Johnson, Merck, UnitedHealth Group, Pfizer, and Abbott Labs.
Johnson & Johnson disappointed investors when it reported on October 15, but Merck and Pfizer reported on Tuesday morning and both provided positive surprises for investors with both raising guidance. The stocks were both up over 3% in early trade on Tuesday. UnitedHealth Group reported on October 15 and it also provided a positive surprise. The stock is up over 10% in the two weeks since the report.
The tech sector has led the market over the past year with a gain of 25.1%, but some of the sector’s biggest names have disappointed investors in recent weeks. Several of the so called FAANG stocks have issued earnings results and two others are set to report later this week. Amazon (Nasdaq: AMZN) reported on October 24 and the company came up short of its EPS estimate. The initial reaction saw the stock down almost 5%, but the stock rallied back.
Netflix (Nasdaq: NFLX) reported on October 16 and the company beat on the EPS estimate, but it came up short on new subscriber growth. The stock gapped higher when it opened for trading the next day, but has since dropped below the pre-earnings price.
Google’s parent company, Alphabet (Nasdaq: GOOG), reported on Monday night and the company came up short of its earnings estimate. The stock dropped over 2% in early trading Tuesday.
Facebook (Nasdaq: FB) and Apple (Nasdaq: AAPL) are set to report after the closing bell on October 30 and that will round out the earnings reports from the FAANG stocks. There has been some discussion lately on whether or not these stocks should even be grouped together anymore as they seem to be in different phases of the business growth cycle. Regardless of whether they should be or not, we may see them separated simply because they seem to be losing some of their luster.
Watching the reactions to both the healthcare earnings and the FAANG earnings, I have several things that I am left to ponder. Are we getting ready to see a sector rotation, away from high flying tech stocks to more stable healthcare stocks? Secondly, will the disappointing earnings from the FAANG stocks lead to lower expectations going forward? The sentiment and the expectations for healthcare stocks seemed to be much lower heading in to the earnings season compared to what was expected for the tech sector and the FAANG stocks.
I have shared my theory before—lower expectations ahead of earnings are a good thing as it gives the companies lower hurdles to clear. With this in mind, I looked at the energy sector stocks that are set to report on Friday—Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). The sentiment indicators for Chevron seem to be more optimistic than they are for Exxon. Both companies are expected to see significant declines in both earnings and revenues. If either or both were to post smaller declines than expected, we could see them move higher. Given the sentiment toward the two, Exxon has a better chance of rallying if they post a smaller decline than expected.
With the energy sector lagging the overall market and with such large companies expected to post declines, expectations for the sector seem to be pretty low. It won’t take much to impress investors at this point.