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These Sector ETFs Are Set to Sizzle on Earnings

Sanghamitra Saha
Investors need to pay close attention to Verastem (VSTM) stock based on the movements in the options market lately.

If the first half of 2018 was all about the initiation of U.S.-China trade tensions, the second half seems to be about the escalation of the same. In the first half, the two countries targeted $50 billion of each other’s goods for tit-for tat tariffs. But now, the situation has deteriorated with President Trump’s latest threat of 10% tariffs on further $200 billion in products imported from China (read: Trump Slaps Further Tariffs: Profit from Inverse ETFs).

In the latest round, Washington has decided to penalize the key Chinese manufacturing export industries with a wide range of items including refrigerators, furniture, fruit and vegetables, handbags, cotton, rain jackets and baseball gloves. The new tariffs will go into effect sometime after Aug 30. Trump has even gone on to say that if Beijing continues to retaliate, the United States will impose a total tariff on $550 billion in Chinese goods – an amount that was not even the total U.S. imports from China last year.

Though the Chinese government appeared determined to take "firm and forceful" actions if Washington enacts levies on $200 billion in goods, the Asian giant is in short supply of American goods to put levies on. Per Asia-Pacific chief economist at IHS Markit, “total Chinese merchandise imports from the U.S. in 2017 were $130 billion, and U.S. merchandise imports from China were $505 billion.” This means China will have to resort to some other political means to retaliate fully.

Which U.S. Sectors Are Expected to be Hit Hard?

Whatever the case, companies that sell “computer chips, oil, basic materials and heavy machinery” will be specifically hurt in the trade tiff.

Energy

China already levied tariffs on some U.S. goods, including crude and gasoline. Over the past six months, the United States’ crude export to China was an average 363,000 bpd. In fact, China along with Canada is the biggest purchaser of U.S. crude, per Reuters. This clearly explains the pressure on the energy industry (read: OPEC Spat & Trade Tension Drag Down Oil: ETFs to Profit).

Semiconductor

Plus, the tech industry is especially vulnerable. Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks on rising trade tensions (read: 5 Sector ETFs Most Exposed to Trade Tensions).

Industrials

With so many industrial and consumer products coming under the threat of tariffs, it is quite natural to fear about the future of industrial and material sectors (read: 5 Sector ETFs Most Exposed to Trade Tensions).

Fear Not, Bet on Strong Earnings Expectations

Though tensions are rife, investors should note that the aforementioned sectors offer some of the strongest earnings expectations for Q2 in the S&P 500 universe. The following sectors have a higher expected growth rate for Q2 earnings and revenues.

Energy – VanEck Vectors Unconventional Oil & Gas ETF FRAK

The energy sector is expected to log about 139.7% earnings growth on 20.2% higher revenues. This is against 19.1% growth expected for the entire S&P 500 on 8.2% higher revenues, per the Earnings Trends issued on Jul 11, 2018.

Materials – John Hancock Multifactor Materials ETF JHMA

The materials sector is expected to register about 53.6% earnings growth on 24.2% higher revenues.

Industrial – Industrial Select Sector SPDR Fund XLI

Industrial products stocks are likely to report a 24.5% growth rate in earnings for Q2 while its revenue growth is expected to be 10.9%.

Technology – First Trust Dow Jones Internet Index Fund FDN

The technology sector is expected to register about 23.8% earnings growth on 10.7% higher revenues.

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