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Strong Earnings Is Driving Sector Rotation Into These 2 Groups

It was a sloppy push to new highs for the S&P 500 this week, after a sharp drop Wednesday on Fed news was followed by a recovery rally on the heels of strong earnings from select Magnificent 7 names. All three indexes posted a 4th consecutive week of gains amid a sharp rise in interest rates, due to strong jobs data today that showed a hot labor market with increasing wages.

While this week’s winner’s list is led by Meta Platforms (META) which surged 20% after posting strong quarterly results and guiding growth estimates higher, the next 9 outperformers in the S&P 500 were stocks from 2 sectors that have been steadily outperforming the markets since early December. These winning names each gained more than 9% last week on strong earnings and a bullish outlook, and what may be surprising is that not one is from the Technology or Internet areas.

Performance Comparison Of S&P 500, Nasdaq, Industrial and Healthcare Sectors

The chart above reveals those sectors, with Industrials (XLI) and Healthcare (XLV) both posting varying degrees of outperformance since early December. With headline news focused on megacap Tech names, it might have been easy to miss this rotation; however, subscribers to my MEM Edge Report were alerted when we began adding Medical stocks to our Suggested Holdings List earlier this year.

Among the top ten S&P 500 gainers in the Healthcare sector last week was medical and surgical equipment manufacturer Stryker (SYK), which gapped up into a 9-month base breakout following news that the company had posted earnings ahead of estimates, while guiding growth prospects higher for this year. Although the RSI is in an overbought position on the daily chart, the weekly chart points to further upside following a bullish MACD crossover from a relatively low level.

Daily Chart of Stryker Corp. (SYK)

Another top ten gainer last week was Eaton (ETN), which is from the Industrial sector. The provider of electrical power and control equipment gapped up on heavy volume Thursday, after the company reported earnings ahead of estimates while guiding estimates higher for this year and next. Overall, electricity demand growth is projected to accelerate, thanks to data centers processing AI, EVs and heat pumps. The base breakout puts the stock in a position to trade higher from here.

Daily Chart of Eaton Corp. (ETN)

Earnings season has often marked a period of sector rotation, as strong growth prospects attract money flows into specific areas of the market. From my many years at Willliam O’Neil & Co., and more recently with my own company, it’s become crystal clear that earnings growth is the key driver among stocks that go on to far outpace the markets.

My MEM Edge Report has a select list of names on the Suggested Holdings List, and we’ve highlighted most of this year’s big winners, such as Deckers (DECK) and Meta (META), which both gapped up on strong earnings today. This twice-weekly report also provides seasoned insights into the broader markets, which has helped investors stay with their winners despite sharp pullbacks such as last Wednesday. Use this link here to access a 4-week trial, as well as all previous reports.

I hope you’ll take advantage of this offer. It’s shaping up to be a game changing earnings season!


Mary Ellen McGonagle

MEM Investment Research

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