Digging into the first quarter’s earnings season allows us to uncover the winning themes of the period as captured by ETFs. Although some of the ETF’s associated with these themes have yet to be rewarded from a performance and flows perspective, this analysis may suggest, to use a hockey analogy, where the thematic “puck is going.”
Despite a market environment of “sticky inflation” and “higher-for-longer” interest rates, first-quarter earnings season has been much better than expected. With 80% of companies in the S&P 500 reporting, the FactSet earnings scorecard indicates that 77% of the index’s companies recorded positive earnings surprises. Meanwhile, 61% saw positive revenue surprises. Also impressive was the blended (year-over-year) earnings growth rate for the S&P 500 of 5.0%. That makes the first quarter of this year the highest quarter for year-over-year earnings growth since the 5.8% recorded for the second quarter of 2022, according to FactSet.
Cloud Computing
One big earnings winner this quarter has been cloud computing. According to Synergy Research, revenue for this market segment experienced growth of 21% year over year, equating to $76 billion. Last year’s cloud earnings blues are a thing of the past thanks to artificial intelligence (AI). AI is driving cloud growth due to the large amounts of data needed to build its models. At the company level, the “Big 3” cloud names — Microsoft (Azure), Alphabet (Google Cloud), and Amazon (AWS) — have been clear earnings winners.
Looking at the top cloud ETFs YTD, the Amplify Global Cloud Technology ETF (IVES ) is up 8.4%. The market leader in terms of assets under management, the nearly $3 billion First Trust Cloud Computing ETF (SKYY ), is up 4.65% YTD. Not far behind from a performance perspective is the Fidelity Cloud Computing ETF FLCD up 4.57% YTD.
Meanwhile, the earnings of semiconductor stocks, the market’s previous AI darlings, have been a mixed bag amid lofty valuations. Furthermore, a key developer of semiconductor manufacturing equipment, Dutch company ASML, reported its bookings fell by 61% sequentially in Q1, taking down other semi stocks with it. ASML’s top customers include companies like TSMC, Samsung, and Intel. Still, the largest semiconductor ETF, the VanEck Semiconductor ETF (SMH), remains up 24.51% YTD, and the iShares Semiconductor ETF (SOXX ) is up 12.68%.
Music
The “Taylor Swift” effect clearly bolstered the earnings of music companies like Universal Music, Live Nation, and Spotify. Universal Music’s Q1 earnings results were up 15.9% on a year-over-year basis, handily beating expectations thanks to client Swift’s music success. Live Nation also reported record results in Q1 as demand for live events post-COVID continues to be strong. Live Nation’s revenues were up 21%, and adjusted operating income grew 15%. And the leading streaming music service provider, Spotify, also reported strong Q1 earnings results, recording revenue growth of 20%. Thanks to higher subscription prices, profit margins reached 27.6%, an increase of more than 243 basis points over last year.
Currently, the MUSQ Global Music Industry ETF (MUSQ ) is a pure play on this theme, with those three companies among its top 10 holdings.
GLP-1 Drugs
The two-leading manufacturers of GLP-1 drugs, Novo Nordisk and Eli Lilly, both reported blowout quarters in Q1. Unprecedented demand continues to outpace supply for GLP-1 drugs for diabetes and obesity. Both companies beat earnings estimates and revised guidance higher.
Novo makes Wegovy and Ozempic, and experienced a 30% increase in earnings, guiding to $2 billion in sales. Lilly manufactures drugs Zepbound (just approved in November) and Mounjaro, and experienced 26% revenue growth in Q1 and increased its full-year guidance by $2 billion.
One ETF is currently targeting this disruptive market segment of pharma, the Tema Obesity & Cardiometabolic ETF (HRTS ), which looks to invest in the weight-loss revolution and beyond. Since its launch in November 2023, the active ETF has amassed over $60 million in assets and has generated a YTD return of 5.65%
But there are two new ETF candidates in the filing stage expected to become effective later this month, the Roundhill GLP-1 & Weight Loss ETF (OZEM), which will also be actively managed and likely concentrated in a very few names, and the Amplify Weight Loss & Treatment ETF (THNR), a passive ETF tracking the VettaFi Weight Loss & Treatment Index (THINR), which is up 18.54% YTD.
While pharma and biotech earnings in aggregate have been strong post the “COVID cliff,” GLP-1 drugs have been the biggest driver of growth. The VanEck Pharmaceutical ETF (PPH ) has also benefited from the GLP-1 drug revolution, up 7.69%, with Eli Lilly and Novo Nordisk its two largest holdings. But there are many new GLP-1 drugs in the pipeline, and GLP-1 drug enablers that will benefit, advocating for a diversified approach.
Cannabis
Ironically, one of the biggest thematic performance winners YTD has been cannabis, even though most companies in the category are not profitable at all and never have been. Nonlevered cannabis ETFs are up on average 31.6% YTD. But rescheduling marijuana as a less dangerous drug could pave the way for billions of dollars in tax deductions for cannabis companies and make them profitable. Currently section 280E of the federal tax code does not allow cannabis companies to claim many standard business deductions. In the case of U.S. cannabis companies, they could be among the thematic earnings winners to come.
Top ETF plays tied to this regulatory change include those that hold considerable multistate operator exposure, such as the AdvisorShares Pure US Cannabis ETF (MSOS ), the Amplify Alternative Harvest ETF (MJ ), and the Amplify U.S. Alternative Harvest ETF (MJUS ).
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