Sector-Level Resources

If you're trying to find forward-looking data on sector performance on the Internet, the best places to look are Yardeni.com, First Call and Standard & Poor's. With six weeks elapsed since the attacks, these publications have all been revised to take lowered economic expectations into account.

For example, I've reproduced two tables below from Chuck Hill's Oct. 1 commentary on First Call, one showing how earnings forecasts for the fourth quarter have evolved over the year, and the other showing how forecasts for the first quarter of 2002 have changed.

Estimated Earnings Growth for Fourth Quarter 2001
S&P 500 Sector	April 1	July 1	Sept. 10	Sept. 29
Technology	1%	-24%	-43%	-49%
Financials	29	25	20	17
Health Care	15	14	15	15
Consumer Staples	22	18	17	14
Capital Goods	15	11	6	-3
Consumer Cyclicals	22	17	8	0
Energy	-19	-21	-28	-31
Comm Services	6	-1	-18	-19
Utilities	10	14	12	9
Basic Materials	21	4	-18	-32
Transports	49	16	-21	-89
S&P 500 Total	12.6%	5.5%	-2.6%	-7.7%
Source: First Call; Prior to Feb. 9, fourth-quarter 2000 estimates changed too much to look at year-over-year growth for the fourth quarter of 2001. Keep in mind that fourth-quarter 2001 is compared with weak fourth-quarter 2000 earnings in many sectors.

You'll notice that health care estimates didn't budge, because, if anything, demand for medical services should be rising with the anthrax scare. Transports, including airlines, were crushed. Economically sensitive sectors such as consumer cyclicals, basic materials, capital goods and energy all showed lower expectations. Earnings estimates in the technology sector fell from negative 43% to negative 49%. Financials held up given lower interest rates, while consumer staples (e.g., toothpaste) are also holding up. S&P 500 earnings overall fell from negative 2.6% to negative 7.7%

Estimated Earnings Growth for First Quarter 2002
S&P 500 Sector	April 1	July 1	Sept. 10	Sept. 29
Technology	51%	32%	4%	-6%
Financials	15	12	12	10
Health Care	16	14	15	14
Consumer Staples	22	15	15	13
Capital Goods	23	15	13	3
Consumer Cyclicals	35	28	26	15
Energy	-10	-17	-25	-28
Comm Services	24%	20	18	17
Utilities	7	7	9	7
Basic Materials	88	72	41	26
Transports	31	N/m	N/m	N/m
S&P 500 Total	20.5%	13.4%	8.2%	3.9%
Source: First Call

Looking at estimates for the first quarter of next year, transports and energy stocks look like they should be avoided. Capital goods, consumer cyclicals, basic materials and technology all show a sharp reduction in growth forecasts, consistent with an outlook in which an economic recovery is postponed by at least two quarters. Health care, financial services and consumer staples held growth estimates fairly steady. One bit of good news is that the technology sector earnings appear to be stabilizing.

Ed Yardeni, the chief economist for Deutsche Banc Alex. Brown, publishes a wealth of statistical data on his site, available free immediately or sometimes after a one week lag. About once a month, earnings forecasts are summarized by sector within the S&P 500 LargeCap, S&P 400 MidCap and S&P 600 SmallCap indices, along with commentary about trends.

Standard & Poor's has additional descriptive data on its Web site, including Excel spreadsheets that can be downloaded and played with. In particular, I like to track how the composition of the S&P 500 changes over time. For example, a year-and-a-half ago, technology stocks accounted for almost 40% of the market cap of the S&P 500; now the percentage is 21.1%.

Why does this matter? As the composition of the S&P 500 changes, so does its risk. You should also note that the S&P has changed some of its sector grouping somewhat in the past year.

Conclusions

It looks as if we haven't quite passed the point where investing in economically sensitive stocks in the consumer cyclicals, capital goods or transportation sectors is relatively riskless. The S&P 500 will probably show four-straight quarters of declining earnings before resuming on an upward track, and we will probably see negative gross domestic product growth for the third and fourth quarters of 2001.

But the economy has shown considerable resilience to the uncertainty caused by the terrorist attacks, and the generational lows in interest rates and the increase in the money supply certainly are priming the pump for a new economic expansion. Still, lower consumer confidence and higher unemployment rates point to lower consumer spending.

Energy stocks, which ran up through late 2000, are now settling back on sharply reduced domestic and international demand. Demand for basic materials is falling and won't revive until much later in the economic cycle. Health care and consumer staples stocks, which benefited from a flight to safety earlier this year, are less attractive now. And in the financial services sector, you ought to choose group by group, because they all don't respond in the same way to the economy and interest rates.

Technology stocks, which most investors seem to hate right now, are particularly interesting to me. The most profits can be made when the tide turns in earnings growth, and there are several reasons why I think the tide might be turning now. First of all, we're past the dot-com craziness of 1999. More importantly, the current overcapacity in communications infrastructure is dissipating as undercapitalized companies are forced out of business.

There's also the impact of the Sept. 11 terrorist attacks, which has corporate MIS (management information systems) officers reviewing and possibly expanding their data storage, firewall, backup and telephone systems ahead of schedule.

Analysts currently estimate that technology earnings will grow 32% in 2002, which is the fastest growth rate among all sectors in 2002. Overall, I think established technology companies with products shipping now, good cash flow and cash in the bank are at the most attractive valuations in five years.

Caveats

Much of the analysis in this article has focused on earnings estimates, which are summarized from stock analysts' reports. For numerous reasons, earnings forecasts are less reliable this year compared with previous years. Therefore, I'd advise you in your own research to focus on relative growth rates and direction rather than assume that these numbers are absolute.

Also, do not underestimate how news coming out of Afghanistan can affect the stock market. It would be a huge blow to U.S. security, for example, if we were forced to withdraw empty-handed from Afghanistan, leaving bin Laden and Al Qaeda to strike at us another day.