Second-quarter earnings kicked off last Friday with reports from some of the largest U.S. banks. That’s merely the start of what will be an earnings avalanche over the next several weeks. These reports could test or boost investors’ appetite for risk. Currently bullish forecasts pertaining to S&P 500 EPS growth could prove accurate or be exceeded. That would likely support elevated risk appetite and potentially provide ballast to select ETFs. The WisdomTree U.S. LargeCap Fund (EPS ) is part of that conversation.
The $944.4 million fund follows the WisdomTree U.S. LargeCap Index, which is weighted by earnings. Put simply, the greater a company’s earnings, the larger its weight can be in EPS. By focusing on earnings stalwarts, EPS delivers a basket of stocks of companies that have been profitable for at least four consecutive quarters. That elevates quality and reduces volatility. That;s highlighted by the ETF sporting lower annualized volatility than the S&P 500 over the past three years.
EPS Could Be Ready to Shine
There’s no denying earnings are the most important form of publicly available information companies release. But EPS is one a small number of ETFs that rely on earnings as a bedrock of weighting methodology. That could be a signal that, with second-quarter earnings season here, EPS could be ready to enhance the value proposition for smart investors.
It’s expected that the S&P 500 will notch YoY earnings growth of 9.3% for the April through June period. That’s the index’s best rate of per-share earnings growth in more than two years. As FactSet’s John Butters noted, that percentage could be significant. And that could be good news for EPS and the broader market.
“Based on the average improvement in the earnings growth rate during the earnings season, the index will likely report year-over-year growth in earnings at or above 12% for the second quarter,” observed Butters. “In fact, the actual earnings growth rate has exceeded the estimated earnings growth rate at the end of the quarter in 37 of the past 40 quarters for the S&P 500. The only exceptions were Q1 2020, Q3 2022, and Q4 2022.”
Precedence for Topping Per-Share Earnings Estimates
Further highlighting the potential for earnings season-related opportunity with EPS is the point that there is historical precedent for S&P 500 member firms topping per-share earnings estimates. In recent years, many of those beats arrived courtesy of the technology and communication services sectors. Those groups account for about 40% of the EPS portfolio.
“Over the past ten years, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 6.8% on average. During this same period, 74% of companies in the S&P 500 have reported actual EPS above the mean EPS estimate on average. As a result, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 5.5 percentage points on average (over the past ten years) due to the number and magnitude of positive earnings surprises,” added Butters.
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