MARKET SNAPSHOT: The Best And Worst Sectors Going Into Earnings Season

By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) -- Third-quarter earnings season ramps up this week, and based on some initial metrics, tech, financials, and health care companies are investor favorites, while consumer staples and consumer discretionary stocks are being snubbed.

Earnings season will begin ramping up this week with Alcoa Inc. (AA) reporting on Wednesday.

The Dow Jones Industrial Average (DJI) , the S&P 500 Index (SPX) , and the Nasdaq Composite Index (RIXF) all finished the week lower even after Friday's strong rebound.

Who do the strategists like?

In a recent note, Birinyi Associates rounded up the sector weightings of nine major banks including Goldman Sachs , J.P. Morgan Chase & Co., and Morgan Stanley. All nine were unanimous in having overweight designations for the tech sector, which also carries the heaviest weight on the S&P 500 at more than $4 trillion in market cap.

None of the banks had telecom or consumer staples as overweight, and consumer staples had the distinction of being the least liked sector receiving the most underweight designations at 7.

The materials sector falls somewhere in the middle this season. Compared with other sectors, better-than-average earnings growth is expected the from materials sector and the number of positive versus negative outlooks is roughly split between companies. Market strategists are split on how to view the sector with J.P Morgan and Morgan Stanley overweighting the sector and Citigroup and Deutsche Bank underweighting it.

S&P 500 sectors ranked ahead of third-quarter earnings reports

(1= best/greatest, 10 = worst/least), source: FactSet, Birinyi Associates

 
Sector           S&P 500 sector market cap weight  Favored by strategist weightings Expected Q3 earnings  growth from year ago Tendency of positive earnings outlooks 
Tech             1                                 1                                9                                          4 
Financials       2                                 2                                4                                          3 
Health Care      3                                 4                                3                                          6 
Consumer Disc.   4                                 7                                10                                         7 
Consumer Staples 5                                 10                               8                                          10 
Industrials      6                                 3                                5                                          5 
Energy           7                                 5                                6                                          1 
Materials        8                                 6                                2                                          2 
Utilities        9                                 8                                7                                          9 
Telecom          10                                9                                1                                          8 
 

Healthcare companies are well-positioned going into the season. Even with stock prices in the sector seeing the biggest gains in 2014, the sector still ranks fairly high with strategists and earnings growth is seen coming in better than most other sectors this season.

Individual company analysts are also bullish on the sector with 59% of ratings on healthcare companies being a buy, according to John Butters, senior earnings analyst at FactSet. That's the highest buy-rating percentage for individual companies among all the sectors.

In addition to Alcoa, other notable companies reporting this week include Yum Brands Inc. (YUM) on Tuesday; Monsanto Co. (MON) and Costco Wholesale Corp. (COST) on Wednesday; and PepsiCo Inc. (PEP) on Thursday.

Next week, reports will kick into high gear with the bulk of earnings coming out of the financials sector starting with J.P Morgan (JPM) , Citigroup Inc. (C) , and Wells Fargo & Co. (WFC) reporting Oct. 14.

"JPMorgan Chase is a significant driver of growth (due to an easy comparison to year-ago loss due to a charge) and Bank of America is a significant drag on growth (due to the DOJ settlement)," said Butters in emailed comments.

"If either/both of those companies report significant upside or downside earnings surprises, it will have a major impact on the growth rate for Financials," Butters said.

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