3 Sectors That Will Lead the Next Earnings Season

As the calendar turns to 2020, investors are already looking ahead to the upcoming earnings season. The last earnings season showed profits slowing. The question for investors is whether this is the canary in a coal mine? Will we look back on those earnings in a year and see a significance that is unclear now. Or will it be seen as a one-off?

To be sure, there are reasons to believe the market may be headed for a correction. But regardless of the overall market direction, there are always some sectors that perform well. Here are three sectors that look like they will be leading the way with positive earnings.

 Semiconductors

Investors have been patiently waiting for the 5G revolution to begin. So too have semiconductor stocks. Companies such as Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Qualcomm (NASDAQ:QCOM) have all seen their stock prices rise impressively in 2019. So what will the sector due for an encore?

According to data from the Semiconductor Industry Association (SIA), the U.S. is the largest producer of semiconductors and has a 44% market share. And there’s no reason to believe that will be slowing down anytime soon. First, semiconductors are vital to building out the growing internet and 5G infrastructure. Demand for smartphones is expected to surge in 2020 as a result of 5G. However, the growing internet of things (IoT), automotive electronics and artificial intelligence (AI) are expected to be catalysts for the industry in 2020. 

Of course, the still unresolved trade dispute with China is still casting a shadow over the sector. The Chinese government is anxious to build out its infrastructure and would have been collaborating with U.S. semiconductor companies. Other headwinds for the sector include pressure to lower costs as the cost of the end devices will remain under pressure. However, for now the sector still has some runway left before those issues come into play.

Financials

One of the headline financial stories of 2019 was the Federal Reserve’s actions to lower interest rates. If Fed Chairman Jerome Powell is to be believed that cutting is now on hold. When interest rates are falling, the stocks of banks and other financial services companies are put under pressure. What is seen as a boon to the consumer is usually a burden to those who issue loans.

However, a funny thing happened to financial stocks in 2020. They continued to rise despite the lower rates. And now that the economy is posting strong job numbers and interest rates are expected to remain at current levels, it’s widely expected that financial stocks should get off to a good start.

And don’t forget, the dividend yield of financial stocks is higher than the 10-year treasury yield. This has been a traditional indicator that the financial sector will outperform the S&P 500 in the coming year.

In addition to some of the familiar names such as JP Morgan Chase (NYSE:JPM), you may also want to keep your eye on the growing Fintech space. Companies such as PayPal (NASDAQ:PYPL) are becoming very disruptive in this space and are a story worth watching in 2020 and beyond.

Health Care

I’ll admit to being a bit of a contrarian on health care stocks. There are some who believe that health care stocks will be under pressure due to 2020 being an election year. As 2019 came to a close, a broad index of health care stocks dropped 6% despite some strong earnings reports. And the health care market as a whole trailed the broader market in 2019.

Is there reason for concern? Sure. If some form of single payer insurance becomes the law of the land, it will create a seismic problem for health care stocks. However, the question has to be asked, how likely is this? I’d have to think not much. And any major changes to health care policy in the United States won’t occur until after the November elections. 

And if history is any indicator, 2009 was largely considered to be an “uninvestable” year for health care stocks. Yet, it turned out to be a tremendous buying opportunity. Is investing in health care stocks a risk? Possibly, but if you look in the right areas it can be very profitable. Pharmaceutical stocks are a great way to play the current health care sector. No matter what happens in the broader health care arena, the demand and need for pharmaceuticals is not going away anytime soon.