These Sector ETFs Offer the Best Upside

The unexpected strength in first-quarter earnings is often cited as a reason for the current stock market rally. With about 92% of S&P 500 firms reporting so far, earnings grew about 8.3%, compared with expectations of 3.1%.

In reality, however, this upside of 5.2 percentage points is fairly typical; companies often lower expectations during the quarter so that they can come back and beat them later on. The upside surprise no doubt appears impressive, but in fact earnings growth has slowed to the lowest level since the second quarter of 2002.

There is academic research supporting the notion that the size of the surprise matters. A 1993 study by Donald J. Peters of T. Rowe Price concludes that surprises are serially correlated, which means they're more likely than not to repeat themselves.

That's the appeal of sector investing through exchange-traded funds -- it allows you to choose which segments offer the best opportunities for growth.

And when looking at the sectors, it's clear there is a lot of variation as first-quarter earnings growth ranged from 13.7% for the Health Care Select Sector SPDR (XLV Quote - Cramer on XLV - Stock Picks) to a drop of 6.9% for Consumer Staples Select Sector SPDR (XLP Quote - Cramer on XLP - Stock Picks).

The chart below illustrates the contribution made by each sector to overall S&P 500 earnings growth, as well as the annual growth rate of earnings.

The chart also indicates the percentage by which actual results exceeded expectations immediately prior the announcement of earnings.

Earnings Growth & Surprise by Sector

Source: www.etfresearchcenter.com

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