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S&P 500 Earnings Guidance Trends Improving


Plus: The best ETF for anyone who needs a moderate dose of beta.

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Over the past few months, I've discussed how earnings-guidance trends for the S&P 500  (INDEXSP:.INX) seemed to be getting a bit better. (See here and here, subscription required.)

FactSet Research Systems' latest S&P 500 earnings summary indicates that guidance has clearly improved in 2014.

In Q4 2013, just 15.9% of earnings guidance was positive, marking a record low.

That number ticked up to 18.6% in Q1, and 24.3% in Q2.

And  negative guidance is 6.9% below expectations, which is an improvement over the five-year average of -10.7%.

In terms of composition, the IT, industrials, materials, and health-care sectors have been positive contributors to the trend change, while consumer discretionary has been a drag.

Of 22 consumer discretionary stocks issuing earnings guidance, just two issued positive guidance.

Unfortunately, revenue guidance hasn't improved over Q1.

In Q2, just 39.5% of revenue guidance was positive, down from 44.0% in Q1. However, it's better than the five-year average of 33% positive.

Now let's compare this to market performance by sector.

Year-to-date, the best performing sector has been utilities (Utilities SPDR ETF (NYSEARCA:XLU)) and the worst has been consumer discretionary (Consumer Discretionary SPDR ETF (NYSEARCA:XLY)), which represented a flip-flop from 2013.

I suspect that if the S&P 500 is to break through 2,000 this year, it will be due to a rebound in consumer discretionary names.

For those looking to add a moderate dose of beta, the XLY ETF is a good candidate. It is heavily weighted in large-cap growth names without the extreme volatility of something like biotech (iShares NASDAQ Biotechnology Index ETF (NASDAQ:IBB). It also has the benefit of low expectations, courtesy of the lousy guidance and year-to-date underperformance.

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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