Through much of the first half of this year, a significant portion of the upside generated by broad large-cap benchmark such as the S&P 500 was attributable to a small number of stocks from just two sectors – communication services and technology. Elevated concentration risk sparked concerns that it would be challenging for stocks to continue trending higher if the equity rally didn’t broaden beyond mega-cap growth names hailing from just two groups.
Fortunately, there are signs that broadening is occurring and if it gains momentum, it could benefit exchange traded funds such as the ALPS O’Shares U.S. Quality Dividend ETF (OUSA ).
OUSA, which follows the O’Shares US Quality Dividend Index, is a valid near-term consideration for investors because as its name implies, it’s a dividend ETF and dividend stocks are likely beneficiaries of the Federal Reserve lowering interest rates. That’s expected to happen this month, but OUSA offers even more utility than that.
Better Market Breadth Could Boost OUSA
There are signs that other sectors and stocks are joining the party and OUSA is reflecting as much. For the 90 days ending Sept. 9, the ETF climbed 6.30%, accounting for just under half of its year-to-date gain of 13.04%.
Adding to the case for OUSA isn’t just the notion that dividend stocks could soon be back in style, but there’s also the expectation that earnings growth is poised to expand beyond sectors with clears ties to artificial intelligence (AI).
“Analysts are forecasting broad-based earnings growth over the next 12 months – especially for sectors tied to the AI theme. See the chart. We see a narrowing gap in earnings growth between U.S. tech companies and the rest of the market – even if tech still leads the way – suggesting U.S. equity returns can broaden. We favor high-quality companies delivering consistent earnings growth and free cash flow in case volatility persists,” according to BlackRock.
In addition communication services and tech, BlackRock sees earnings per share momentum for sectors such as energy, industrials, materials and utilities. Industrial and utilities stocks combine for over 14% of the OUSA roster. Additionally, the U.S. economy avoiding a recession could also bolster the case for OUSA.
“U.S. earnings growth broadening beyond early AI winners is a sign the economy is more resilient than markets are pricing. Growth is moderating as expected. Yet we view extreme market reactions to softening economic data as overdone. Activity is holding up versus what some sentiment data would imply,” adds BlackRock.
As for AI leverage, OUSA has some as the ETF allocates almost 23% of its weight to tech stocks and Apple (AAPL) and Microsoft (MSFT) are the ETF’s top two holdings.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
