The second earnings season for 2018 is approaching, and considering this, it is good idea to review our portfolio. According to a large number of market participants, the Q2 season will be very favorable to cyclical companies where EPS growth of more than 20% will be in the range of normal.
Earlier today, it became clear that Morgan Stanley cut its forecasts for the technology sector and increased its expectations for the defense sector. According to the bank, the most profitable in Q2 were energy companies, technology companies, retailers, and mining companies.
Since the trade tariffs came into force a few days ago, we can not expect a significant impact on the sectors which is most exposed to the risk.
What the numbers above say and where to position ourselves best?
On the main chart (SP500 – Daily candle chart) I have imposed the price movements of the different sectors. It turns out that stocks in the raw materials sector (gray price line) are the most underestimated against SP. Following are the shares of the defense sector (the orange price line), and the shares of the energy sector (the blue price line) are overestimated against the SP500. This is the result of the sharp rise in oil prices over the past few months, which a large share of energy companies have taken advantage of. Given the lagging behind in the defense sector and raw material yields, as well as the good prospects for them, it is good to target fresh capital precisely and to reduce our exposure to the energy sector, where everything seems to have accumulated.
Source: Bloomberg Pro Terminal
Chart: Used with permission of Bloomberg Finance L.P.
Trader Petar Milanov