Last week, we shared the companies in the Russell 1000 that had seen the biggest changes in exposure to the fundamental factors of Growth and Profitability since the beginning of 1Q earnings season. Today, with more earnings in the rearview, we'll run the same analysis at the Industry Group (GICS 2) level in order to see what more we can learn about the market's response to earnings via these two factors.
First, let's start with a review of the past week's market and factor action:
US Market (4/26/19 - 5/2/19)
Here's an update on how some key factors (and US Total Risk) have changed in the US model over the past week, using our normalized return indicator.
- Most notably, Volatility and Market Sensitivity both saw positive normalized returns for the first time in a while, after selling off heavily since late January. Volatility bottomed out at -1.31 SD below the mean on 4/25 and Market Sensitivity appears to be bouncing back from a 4/22 trough of -1.26 SD below the mean.
- Profitability and Earnings Yield continued to see slight gains, with Profitability rising deeper into Overbought territory.
- Growth saw the biggest increase this week, continuing its rally back to Neutral after hitting a nadir of -1.11 SD below the mean on 4/5.
- Size peaked at +1.51 SD above the mean on 4/16, and has fallen back into the Neutral category as large caps seem to be losing favor in a more risk-on factor market.
- US market risk continued to fall at a fairly rapid clip, down 56 bps in the past week.
1Q Earnings - Industry Group Read-throughs from Growth and Profitability
We took a look at exposure to Growth and Profitability for the constituents of the Russell 1000 and then rolled them up to the Industry Group (GICS II) level.
As a refresher, the Growth and Profitability factors typically see the most impact during earnings and periods of early market recovery because they're based on fundamental data, rather than price information. Thus, movement in these factors can show us the impact of analyst re-ratings, changes in analyst estimates, etc.
The Growth factor includes purely fundamental metrics such as sales growth, estimated sales growth, earnings growth, and estimated earnings growth. The Profitability factor includes return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.
Methodology: We took a snapshot of Growth and Profitability exposure for the constituents of the Russell 1000 (equally weighted) on 4/1/19 and 5/1/19, then calculated the delta between the two dates. We then aggregated company exposures at GICS Level 2 in order to find the Industry Groups that have had the highest net relative positive and negative change in exposures to these factors. All exposures are presented as z-scores.
Absolute exposure for Growth in the Russell 1000 remained flat at -0.08 between 4/1 and 5/1. Digging deeper, here's how exposure to Growth changed at the Industry Group level:
Top 5 POSITIVE Growth Exposure Changes
Here we can see that the biggest Growth rerating so far during earnings has been in Energy, with an increase resulting in a less negative exposure to Growth. Insurance and Financials (ex-Banks) also saw their relationship to Growth become slightly less negative during this time.
Top 5 NEGATIVE Growth Exposure Changes
On the flip side, we can see that Materials saw an increase in negative exposure to the Growth factor, while Software experienced a slight decrease in its usual extremely high exposure to the factor.
Just like Growth, Profitability exposure for the equal weighted Russell 1000 remained constant at -0.09 between these two dates, but there was some movement at the Industry Group level.
Top 5 POSITIVE Profitability Exposure Changes
Here we saw Real Estate have the most movement, with some slightly reduced negative exposure to Profitability. Energy popped up here again as well, raising its exposure out of the negatives and becoming completely neutral to the factor.
Top 5 NEGATIVE Profitability Exposure Changes
Very slight changes here as Materials and Pharma exposure became slightly more negative, and the changes in the rest of the top 5 were fairly muted.
With net exposure for Growth and Profitability in the Russell 1000 remaining flat over the past month, we didn't expect to see huge deltas when running this exercise. We were still surprised to see how slight the changes were, with the biggest rerating out of all industry groups being Energy at +.006 Growth exposure. Insurance, Financials, and Banks also saw small increases in their exposure to Growth and Profitability during the earnings period. Perhaps the one interesting note on the negative side is that the Growth-obsessed Software group saw a decrease in its exposure to that factor during this time.
Next week, we'll be looking at a different set of factors through this same lens to see if there are any notable read-throughs. If you'd like to learn more about your portfolio's relationship to factors, please don't hesitate to reach out.