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Which Sector will Outperform in Q4?

Neena Mishra

Second quarter earnings season is behind us and we are a few weeks away from the start of the third quarter earnings season. Looking at the earnings results and earnings growth expectations for major sectors, some sectors look better positioned than others.

Sector ETF YTD Return Earnings Growth (YoY)*
      2013 E 2014 E
Consumer Discretionary XLY 26.7% 12.3% 16.6%
Financials XLF 23.8% 16.9% 8.7%
Industrials XLI 22.1% 1.6% 10.8%
Energy XLE 18.3% -2.2% 10.4%
Consumer Staples XLP 15.7% 5.8% 9.6%
Materials XLB 12.7% 0.1% 18.8%
Technology XLK 11.6% 1.3% 11.1%
Utilities XLU 6.1% 4.8% 7.7%

*Source: Zacks Earnings Trends

Cyclical sectors like Industrials, Energy and Materials have picked up some momentum in the past month or so as the global economy shows clear signs of recovery.
Will industrials continue to benefit from the strong revival in global manufacturing activity?

Finance sector has been the earnings growth leader this year while Technology continues to be drag on earnings growth.
Can financials, banks in particular, continue to benefit from the rising rates/steepening yield curve environment?
Consumer discretionary stocks were hot earlier this year but recent spending data has been rather weak.  On the other hand, high-end spending continues to be resilient.
Materials sector remained out of favor with investors earlier this year but has displayed strong performance in recent weeks on the back of improved growth outlook in China--the world’s largest consumer of commodities.
Which sector do you expect to outperform in the fourth quarter?

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