Wells Fargo upgrades Materials Sector to Overweight from Market Weight, Energy Sector to Market Weight from Underweight; Downgrades Consumer Discretionary and Financials Sectors to Underweight from Market Weight
- Firm upgraded their expectations for materials sector EPS growth in March, primarily due to improving chemicals production and buyback acceleration, and they continue to expect materials sector earnings growth to exceed S&P 500 growth, matching consensus expectations. They continue to recommend an overweight on chemicals and underweight on metals and mining.
- Firm notes Energy sector top-line pressures appear to be easing with the bounceback in commodity prices so far this year. Meanwhile, production growth is expanding as capital spending growth is finally slowing down a bit. Their 2014 estimate for energy sector EPS growth is now 3%, up from their former estimate of 0%, and their 2015 estimate of 5% energy sector EPS growth is now near consensus expectations for 7%.
- A slower pace of housing activity will likely result in a slower pace of broader discretionary spending this year. As a result, they expect just 5% EPS growth for the discretionary sector this year and 6% EPS growth for the sector next year, versus the consensus expectation for 9% growth in 2014 and 15% growth in 2015. At the industry level, they prefer services (such as media and hotels) over goods industries (such as retail), consistent with a shift toward later cycle exposure in the index.
- Consistent with a flattening yield curve and dampened trading activity, they reduce their expectation for financials sector 2014 EPS growth from 10% to 6% and their 2015 EPS growth estimate from 8% to 5%. With consensus expectations for sector EPS growth at 9% and 12%, respectively, estimate achievability for financials appears rather low. Consumer finance is the only industry they recommend as an overweight, and they suggest underweighting capital markets and thrifts & mortgages. >
- While we are edging into commodity-sensitive segments, they are not fully embracing a late-cycle positioning, as an inflation breakout still seems distant. Instead, they are generally focused on midcycle, quasi-defensive segments of the market with high estimate achievability, steady price momentum, and relatively strong estimate revisions. Their overweight sectors are now technology, health care, and materials.