ETFs
ETFs in focus as S&P 500 earnings improve beyond AI
The S&P 500 index has jumped about 17% since the start of the year, led primarily by a handful of stocks known as the “Magnificent Seven,” tied to big tech and AI technologies. NVIDIA NVDA alone has accounted for more than a third of the index’s gains in 2024.
However, the remaining 493 stocks in the S&P 500 have been under earnings pressure since early 2023. These stocks are in an earnings recession, with no annual earnings growth since the fourth quarter of 2022, according to a Yahoo Finance article.
Profit recovery outlook improves
Bank of America analysts expect this earnings slump to end for the majority of S&P 500 companies starting in the second quarter of 2024, Yahoo Finance reports. Earnings growth forecasts suggest improvements of 6%, 7% and 13% annually in the second, third and fourth quarters, respectively, although this growth is expected to lag behind AI-driven sectors.
According to the earnings trends report released July 3, second-quarter earnings for the Big Seven are expected to rise 25.5% from a year earlier, with revenue up 13.2%. Excluding the Big Seven, second-quarter earnings growth for the rest of the S&P 500 is expected to decline from 8.6% to 5%.
Nonetheless, energy sector earnings growth is on track to turn positive in the second quarter, after remaining in negative territory for the previous four quarters. Medical (+19.0%), energy (+10.9%), consumer discretionary (+12.5%) and financials (+9.0%) are the main non-tech sectors that gained momentum.
Recovery offers hope for earnings-focused ETFs
Wall Street is increasingly concerned about the wide divergence between AI-driven stocks and others in the S&P 500. Some analysts believe the S&P 500 index may not continue its winning streak if the AI rally loses steam. In such a scenario, improving earnings from non-AI stocks in the S&P 500 could serve as a tailwind for profit ETFs like WisdomTree US Large Cap ETF EPS (read: 5 ETFs to play on share buybacks of booming companies).
Focus on EPS ETFs
The underlying WisdomTree US LargeCap Index is a fundamentally weighted index that measures the performance of earnings-generating companies within the large-cap segment of the US equity market. The fund charges 8 bps of fees and generates an annual return of 1.53%.
The fund, which has 500 stocks in its basket, is well-allocated across each component, with each holding less than 5.92% of the shares. Additionally, the WisdomTree US LargeCap Index is exposed to a number of sectors, with Information Technology (26.99%), Financials (16.65%), Communication Services (13.47%), and Health Care (10.10%) each holding double-digit positions. EPS has a Zacks ETF Rank #3 (Hold) with a medium risk outlook.
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NVIDIA Corporation (NVDA): Free Stock Analysis Report
WisdomTree US LargeCap ETF (EPS): ETF Research Reports