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Two ETFs on watch as aerospace and defense scores modest Q1 results

The Q1 earnings season has failed to impress investors as factors including a stronger dollar and a slump in energy prices have weighed on the revenue results. As of Thursday morning, total earnings for 333 S&P 500 members that account for around 73.5% of the index’s total market capitalization, were up 4.9% undermined by 3.6% lower revenues. Out of these companies, 66.5% have beaten earnings per share estimates while only 40.1% came in ahead of top-line expectations.

It is the strong earnings growth in the finance sector that kept the Q1 earnings on track. Excluding finance, total Q1 earnings would have been down 1.9% on 4.3% lower revenues. This also had a negative impact on earnings estimate revisions. Total earnings for the S&P 500 index are now expected to be down 6.4% in Q2, a reversal of 1.1% growth expected in early January. 

Aerospace & Defense, a relatively smaller sector within the S&P 500, provided better results in the first quarter given the tepid environment. However, factors including declining demand amid global growth worries, strength in the U.S. dollar and decline in oil prices had a negative impact on the earnings results of some of the companies from this sector.

Meanwhile, elevated geopolitical risk appear to be fueling support in Washington for an increase in fiscal 2016 defense spending above sequestration caps. Further, rising threat from the Islamic State in Iraq and Syria (ISIS, or ISIL) saw an increase in U.S. defense expenditure. These factors are likely to have a positive impact on the companies from this domain.

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