Jhe S&P 500 net profit for the first quarter was 12.1%. This is below the 12.3% expected at the start of the quarter, but some sectors should generate impressive margin growth.
It’s no surprise that energy is one of those groups, and that could be good news for exchange-traded funds like the Invesco S&P 500 Equal Weight Energy ETF (RYE). Despite the dominance of large-cap energy stocks this year, which of course carries over to cap-weighted energy funds, RYE is up 46.39% year-to-date.
Home to nearly $581 million in assets under management, RYE tracks the S&P 500® Equal Weight Energy Plus Index — the equal weight equivalent of the capitalization-weighted S&P 500 Energy Index. ETF Invesco could have a compelling earnings season if energy meets or exceeds margin expectations.
“At the sector level, four sectors report (or are expected to report) a year-over-year increase in their net profit margins in the first quarter of 2022 compared to the first quarter of 2021, led by the energy sector (11, 1% vs. 4.6%).. On the other hand, seven sectors report (or are expected to report) a year-over-year decrease in their net profit margins in the first quarter of 2022 compared to the first quarter of 2021, led by the financial services sector (17.2% vs. 22.7%),,” says John Butters of FactSet.
Quarter-over-quarter, energy profit margins are expected to rise 160 basis points, the second-largest increase among the 11 GICS sectors.
There is another reason why RYE is a relevant consideration today: energy is one of the sectors best suited to fight inflation, as evidenced by its yields. Conversely, inflation is proving to be a drag on the profit margin for many other sectors.
“Higher costs likely negatively impact net profit margins. Producer prices rose 11.2% in March, the largest year-over-year increase on record. In the previous earnings season, 356 S&P 500 companies cited ‘inflation’ on fourth quarter earnings calls, which was the highest number in at least 10 years,” Butters adds.
Additionally, RYE has value, as approximately 54% of its 24 holdings are considered value stocks. RYE’s holdings range from 4.17% to 5.10%. On the flip side, just two stocks — Exxon Mobil Inc (NYSE:XOM) and Chevron Inc (NYSE:CVX) — combine for more than 44% of the capitalization-weighted S&P 500 Energy Index.
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