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These are the market's bright spots right now: Strategist

The market's worries about China and Greece are being compounded by lower oil prices. The energy sector (XLE) has already taken its toll on the S&P 500's (^GSPC) earnings this year. But as companies report second-quarter results, one strategist sees some positives signs elsewhere in the market.

The energy sector's second-quarter earnings are expected to show a 63% drop compared to the same time last year, according to Erin Gibbs, equity chief investment officer at S&P Investment Advisory Services. Though energy makes up just 8% of the index, its huge earnings decline is a big reason why she sees the S&P 500’s overall second-quarter earnings falling by 4%.

“But we have a few sectors that are looking really good,” said Gibbs, who is responsible for over $16 billion in assets under advisory. “Healthcare (XLV) is absolutely the bright spot. We also have some good earnings growth in telecom (XTL). And financials (XLF) are actually looking very good for the second quarter.”

She expects 7% growth in the healthcare sector’s earnings and revenues when all of Q2’s numbers are tallied. “There are some very expensive stocks,” Gibbs said, “but if you start moving outside the biotech (IBB) area, we still have some very good growth and also strong revenue growth.”

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Consumer discretionary (XLY) stocks should also show signs of strong growth, said Gibbs. She sees 6% earnings growth and 3% higher revenues compared to last year. However, with well-known names like Disney (DIS), Amazon (AMZN), and McDonald’s (MCD), the sector often sees higher valuations, Gibbs said.

“People tend to pile in so you get higher multiples,” she said. “But there are still opportunities for some of the companies that are still turning around.”

On the flipside, Gibbs cautions investors to stay away from utilities. Since companies in that sector usually pay steady dividends, utilities stocks are treated like coupon-paying bonds. And like bonds, share prices in utilities tend to fall as interest rates climb. As the Fed is expected to begin tightening perhaps as early as September, Gibbs sees the sector struggling over the next couple of quarters.

Though she anticipates a flat 2015 for the overall S&P 500, Gibbs is forecasting 12% earnings growth in 2016.

“Next year looks great,” she said. “A lot of that is because we don’t have energy weighing on it but also because other companies are just doing better.”

“We might see a better market in 2016,” Gibbs added.

 

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