Where To Find Growth In 2020

The Growth Outlook Takes A Beating

I am going to be brutally honest, the consensus outlook for S&P 500 (SPY) EPS growth in 2020 is going to fall and fall hard now that oil prices have tanked. The upshot is the outlook for 2020 EPS growth for the broad market was primarily driven by a single sector and that sector is the one hurting most today. 

The Energy Sector (XLE) was expected to do most of the heavy-lifting for the broad market in 2020. Those expectations will not be met. With oil trading at $30 a barrel, most of the integrated producers will have a hard time making money and sustaining dividends, if they even pay them. The shale-oil producers will be hurt the worst, they are going to start closing down because their break-even point is in the mid-$40 region.

The consensus estimate for 2020 EPS growth fell another 0.70% in the last week without the bottom falling out of oil prices. Virus-related downward revisions have been accelerating and I don't think that pain is over, add in the oil issues and 2020 could easily see negative growth in the broad market. The outlook for 1st quarter growth already fell below 0.0% and it is heading lower. While the remaining three quarters are also under pressure they, at least, show positive growth is still in the forecast.

Not All Sectors Are Weakening

When you break the S&P 500 down by sector it becomes clear that not all sectors are under the same pressure. The earnings outlook for some sectors is holding up quite well despite warnings from high profile companies. Microsft (MSFT) and Apple (AAPL) have both warned about 1Q revenue-raising fear for tech-sector earnings. Apple estimates the coronavirus could impact its earnings by 10% or more and yet the Technology Sector consensus estimate for 2020 hasn’t budged because the analysts still expect the economy to back very quickly.

Sectors other than Energy with negative consensus growth trends for this year include the consumer discretionary sector (XLY), the industrial sector, and the financials (XLF). The consumer and industrial sectors will bounce back later this year, once the virus is past, but the financials will struggle with low-interest rates until 2021 at least. The CME’s FedWatch Tool is showing a high expectation for another 75 basis point cut at the March meeting, we will be seeing even lower rates in the near future.

The Top Sector For 2020 EPS Growth Is …

The top sector for 2020 EPS is now the Technology Sector (XLK). The consensus outlook for this sector has barely budged throughout the coronavirus-driven sell-off leaving it in #1 spot for EPS growth this year. The sector is supported by long-term secular trends that include the shift to cloud computing, the roll-out of 5G, the Internet of Things, and consumer demand.

When I looked at the daily chart of the XLK Technology Select SPDR I got a little excited. The ETF took a big hit with today’s sell-off but the technical action is promising. Today’s action has the index hitting and bouncing from a strong support level (a previous all-time high) with supportive indicators. The indicators are technically bearish but divergences in the MACD and stochastic suggest a strong buy signal is on the brink of forming.

You Can Do Better Than The XLK

What I don’t like about the XLK is twofold. On the one hand, it pays a ridiculously yield compared to what you can find within the broader technology sector, about 1.25% with today’s decline. On the other, the two top holdings are MSFT and Apple at about 20% each. In this day and age, most people already own those two stocks in some form or other be it ETF, closed-end or mutual fund.

Two of the higher-yielding stocks in this basket are Cisco Systems (CSCO) and Intel (INTC). Intel is yielding about 2.45% today while Cisco, an IP and network systems specialist, pays about 3.7%. Both will benefit from the coming 5G/IoT revolution CSCO would be my choice for yield, dividend safety, and the outlook for future dividend growth.