XLB Materials Select Sector

After the stock market’s strong year-to-date gains, we have updated our outlook for the market in the Zacks Market Strategy report for March, available on Zacks Premium.

Here is a short summary of the report’s key points:

Year-end 2013 Target for the S&P 500

At 14.7 times this year’s conservative earning estimate, stocks remain slightly undervalued. Consider the average stock market P/E is 15. Apply that to $113 per share optimists expect for the S&P 500 in 2013 (Ticker:SPY).

That computes to fair value at 1695!  

Even if you say those earnings projections are high (we would agree), trimming to a more conservative level of $105 per share gives S&P 500 fair value of 1575.

With the above, we remain comfortable putting out a 2013 target of 1600 for the year-end S&P 500. That is an earnings yield of 6.56%.  In fact, if we get towards the end of 2013 with U.S. GDP in healthy shape and no U.S. recession on the horizon, we could easily get a nice stretch above 1600.

Stocks have run for close to 4 months. Is a pause or correction due?  The last two macro event relief rallies in 2010 and 2011 lasted six months. Sell in May and go away?

Fourth Quarter Earnings Season Concluded

For Q4, 97% S&P 500 companies have reported earnings and revenues.  They were up +2.2% and +1.5% y/y, respectively. Revenue outperformance has been largely a function of subdued expectations. This was better than Q3, but the second lowest growth rates since the recovery got underway in 2009.

The market doesn’t seem overly concerned.  It is looking ahead to expected GDP growth in 2H-13. Earnings growth in 2H-13 and 2014, which mirror estimates for GDP growth, shows a material ramp up.  A less worrisome tone on company guidance in Q4 earnings calls and recent favorable macro data raised confidence.

This has been at play in the S&P 500’s positive momentum.

March S&P 500 Sector Update

(A) With a rise in Feb. U.S. jobs numbers and upward 2013 jobs revisions, and a stock market hitting multi-year highs, the personal sides of Consumer Staples (Ticker: XLP) and Consumer Discretionary (Ticker: XLP)  are highly ranked:  Soap & Cosmetics, Home Furnishing - Appliance, Apparel and Leisure Activities ranked well.

The basics underperform:  Food, Beverages, Autos-Tires-Trucks and Tobacco industries showed us very weak Zacks Ranks in the space.
 
(B) High Zacks Ranked industries arrived from building U.S. momentum in the Finance sector (Ticker: XLF) focused on home finance and the stock market. Thrifts & Mortgage Finance and Investment Banking & Brokering industries showed up strong.  

Real Estate (REITs and Management) remains a Market Weight.

(C) Marked improvement in the domestic and global outlook (mostly China) pushed up the Materials (Ticker: XLB) sector. Strength was apparent in high Zacks Industry Ranks for Chemicals and Paper.

(D) In addition, there is a notable change inside the Industrials sector (Ticker:XLI) on this stronger domestic and global outlook.   Electrical Machinery, Construction - Building Services, Transportation and Transportation - Air rebounded nicely.  

Industrial Products - Services, Metal Fabricating and Business Products still struggle.

(E) IT (Ticker: XLK) looks strong now, as Telco Hardware and Electronics rose to become attractive Zacks Ranked Industries.  Semiconductors remained a market weight. Computer Software & Services ranked as a market weight industry after the conclusion of Q4-12 earnings too.

(F) Stronger gasoline at the pump prices played out within the Energy sector (Ticker: XLE).  We saw Oil-Misc. with its Refiners do best in the Zacks Ranks, though there was a Zacks Rank rise in Drilling, E&P and Integrated Oil companies further downstream.

Alternative Energy and Coal remain weak, victims of low natural gas prices.

 
SPDR-MATLS SELS (XLB): ETF Research Reports
 
SPDR-EGY SELS (XLE): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
SPDR-TECH SELS (XLK): ETF Research Reports
 
SPDR-CONS STPL (XLP): ETF Research Reports
 
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