US Strategy: 4Q18 Quarterly Earnings Report March 4, 2019 974

Last December, U.S. Stocks posted the worst returns since the Great Depression. The market was buffeted by a slew of negative news – Fed rate hikes, increasing probability of recession and trade war and slower economic growth. However, the market might have overreacted as there was a huge rally in January after the correction in December. The following figures provide a flavour of the stock market performance since the start of 2019.

There is a wide variation in terms of EPS and revenue performance among sectors. The top 3 sectors with the highest number of firms that beat EPS expectations were energy, consumer discretionary, and healthcare. The consumer discretionary and healthcare sector performed especially well in CQ4 2018 as most of the companies in the sector exceeded both EPS and revenue expectations (Figure 1 and 2). On the other hand, most of the companies in the utility sector underperformed in terms of both EPS and revenue expectations. Rising interest rates has hindered their ability to pay out or increase dividends. This would make the sector less attractive compared with fixed income investments.

Revenue growth is moderating for most sectors. YoY revenue growth for S&P 500 decelerated 2.4 percentage points in CQ4 2018 (Figure 18). Defensive sectors (communication services, consumer staples and utilities) were able to maintain the growth momentum while all other sectors except industrials experienced slower revenue growth.


Cyclicals still look cheap, while defensive sectors are mostly expensive. Both the financial and industrial sector are currently trading below historical average. On the other hand, consumer staples, communication service, healthcare and utility sector are all trading above historical average.


Year-to-date returns of all sectors are positive, with Industrials leading the rally.  All 11 sectors posted stellar returns, with 8 out of 11 sectors achieving double-digit gains year-to-date (Figure 6). The industrial, real estate and communication service sectors posted the highest year-to-date returns.


The energy and industrials sectors look the most attractive. From the 4Q18 results and valuations, we recommend the following sectors for our tactical view:

  1. Energy: Most of the companies in the energy sector beat expectations and are trading at 16.3x earnings, which is below historical average. (SPDR Energy Select Sector ETF)
  2. Industrials: Industrials sector beat revenue expectations and are trading at 17.6, which is below historical average (Industrials Select Sector ETF)

Figure 1: Firms of each sector that beat EPS expectations

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About the author

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Edmund Xue
Research Analyst
Phillip Securities Research Pte Ltd

Edmund covers the US Market Strategy. He was previously a risk transformation consultant in the Big Four.

He graduated with a Bachelor of Accountancy (Honours) with a major in Finance from the National University of Singapore.

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