For any investor who thought the tech sector had some earnings momentum that could carry it through this economic minefield, Tuesday's results dashed that hope. The Apple (AAPL) miss was the highest-profile, but it was far from alone. Juniper (JNPR) guided down for the third quarter, Linear Tech (LLTC) missed, Compuware (CPWR) missed on revenue, Cymer (CYMI) missed revenue and guided down and Harmonic (HLIT) missed revenue and guided down. Even Broadcom (BRCM) snuck in weak guidance. Seems like only Riverbed (RVBD) and Altera (ALTR) looked good, but even Altera's beat was on a 15% decline in revenue!
Retail is soft, and cyclicals are getting crushed no matter what they report. Where is an investor to hide?
I won't answer that completely, since there are many inputs you need to consider, but let's at least look at the earnings momentum by sector. By looking at the estimate revisions in each sector, we can at least get a sense of which groups (and constituent companies) are holding up better than others. You can combine this with your fundamental research, technical patterns and so on, and thus assess where you can take cover.
Below is a table with the S&P 500 broken into sectors. The sectors are ranked by their earnings momentum relative to the overall index. Smaller numbers are better; 5 is average. Larger numbers are to be avoided -- they are lower-decile groups and indicate very poor estimate trends.
The safest sectors are some of the most stable: communications (think Verizon (VZ) and AT&T (T)), or distribution services (think Sysco (SYY) or AmerisourceBergen (ABC)). I am less convinced retail is that good, except the sector is dominated by Wal-Mart (WMT), which will do better on the margin in a poor economic environment. Transports might have been more believable until United Parcel Service (UPS) hit a pothole last night.
The stocks at the bottom of the list are easy to avoid, as they have significant cyclical economic exposure. Non-energy minerals are the coal, iron and steel companies of the world. Don't be tempted by the low multiple -- it's a value trap! Energy is under pressure from falling commodity prices, too.