US Earnings Season in Full Swing... Focus on Financials, Industrials, and Software

As the second-quarter earnings season kicks off, led by major U.S. financial stocks, analysts have suggested that investors should focus on the financial and industrial sectors, as well as the software industry. Notable exchange-traded funds (ETFs) mentioned include the Financial Select Sector SPDR Fund, KODEX US S&P500 Financials, KODEX US S&P500 Industrials (Synthetic), and KODEX US AI Software TOP10.

On July 15, Park Hyunjung, a researcher at Daishin Securities, stated in the "Global ETF Issues & Ideas" report, "Although only the communication sector has seen its second-quarter earnings forecasts revised upward since the first-quarter earnings season, the sectors with valid mid- to long-term earnings momentum are financials and industrials."

Park first pointed out, "The 12-month forward price-to-earnings ratios (PER) for the S&P500 and Nasdaq 100 have now recovered to 22.1x and 27.1x, respectively, reaching levels seen at the end of last year. With the earnings season underway, it is a time when valuation concerns are emerging. Given the difficulty in clearly assessing the impact of tariffs, I prefer a quality style that considers corporate fundamentals."

The preferred sectors are financials and industrials, and the favored industry is software. Of the 11 GICS sectors, financials, energy, and industrials have shown improved 12-month forward EPS growth rates compared to the end of April.

Park noted, "Financials and industrials also benefit from policy momentum, such as SLR regulatory easing, cryptocurrencies, and the OBBBA bill, which is a positive factor. Within the information technology sector, semiconductors are the industry with improved quarterly results, but from a mid- to long-term perspective, software stands out." The S&P500 Software Index has risen 35.8% since its mid-April low, and its 12-month forward PER is now 33.3x, close to the year-end 2024 level of 33.9x.

He added, "Recently, as the market has strengthened due to the so-called 'Taco Trade,' there are growing concerns about TWIST (Trump Will Impose Severe Tariffs). However, short-term volatility should be seen as an opportunity to increase exposure to financials, industrials, and software."

In terms of ETFs to watch, Park suggested: for the financial sector, the Financial Select Sector SPDR Fund (XLF) and KODEX US S&P500 Financials (A453650); for the industrial sector, the Industrial Select Sector SPDR Fund (XLI) and KODEX US S&P500 Industrials (Synthetic, A200030); and for the software industry, the iShares Expanded Tech-Software Sector ETF (IGV), SOL US AI Software (A481180), and KODEX US AI Software TOP10 (A0041D0). From a quality strategy perspective, the iShares MSCI USA Quality Factor ETF (QUAL) was also included in the list.