AI wave: Tech remains top-rated Quant pick as Q2 earnings near

With the second quarter earnings season around the corner, technology (NYSEARCA:XLK), communication services (NYSEARCA:XLC) and energy (NYSEARCA:XLE) ETFs emerged as the highest-rated funds among the 11 S&P 500 (SP500) sectors, as per Seeking Alpha’s Quant system.

The Quant Ratings system awards grades based on quantitative measures, like valuation, earnings growth, and recent stock performance. The highest possible score for any individual company is a 5.

Highest-ranked sectors

The technology sector has seen an impressive run so far this year, led by a boom in artificial intelligence technology. The S&P 500 Information Technology sector jumped a stunning 27.8% in the first half, while its accompanying ETF (XLK) gained 17.5%.

The Technology Select Sector SPDR Fund ETF (XLK), which holds the highest weightage of 33.24% on the S&P 500, took top spot with a Strong Buy rating and a score of 4.64 out of 5 as per Seeking Alpha’s Quant system. Super Micro Computer (SMCI), Arista Networks (ANET), Corning (GLW), Autodesk (ADSK), Adobe (ADBE), Nvidia (NVDA) and Broadcom (AVGO) were among the top-rated tech stocks.

Communication services (XLC) ranked second, benefitting massively from the heavy weighting in Meta Platforms (META) and Alphabet (GOOGL), which have performed very well this year. The sector has gained over 20% year-to-date and holds a Quant score of 4.18 with a Buy rating.

The Energy Select Sector SPDR ETF (XLE) took third spot with a Quant score of 3.87 and Buy rating. The ETF had logged a 6% gain YTD, with the fund’s valuation and total shareholder yield some of its strong attributes. Chevron (CVX), Devon Energy (DVN), Baker Hughes (BKR), ONEOK (OKE) and Exxon Mobil (XOM) grabbed were among the top-rated energy stocks.

Lowest-ranked sectors

Real estate (NYSEARCA:XLRE) and Utilities (NYSEARCA:XLU), with a respective score of 1.77 and 2.59, were sectors with the lowest Quant score. The former was the only sector in the S&P 500 (SP500) index with a Sell rating.

The Real Estate Select Sector SPDR Fund ETF (XLRE) is down 5% year-to-date, as much of the commercial real estate sector has been deteriorating amid rising delinquency rates on debt and falling property values. SBA Communications (SBAC), Crown Castle (CCI) and Equinix (EQIX) were the lowest rated real estate stocks as per SA’s Quant system.

Views on S&P 500 Q2 earnings:

The S&P 500 (SP500) index advanced 14.16% during the first half of 2024, thanks to a rally in technology stocks amid the AI boom. Wall Street’s benchmark gauge has been on a record-breaking run, hitting 34 all-time highs so far this year.

The S&P 500 earnings data is supportive of the bull market narrative, said SA columnist Brian Gilmartin. All eyes will be on JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) as major banks start reporting from July 12.

The banking sector is likely to benefit from a marginally improved interest rate environment and hopes of further rate cuts by the Fed Reserve. However, sluggish loan growth may weigh on net interest income even as margins are set to increase after bottoming out. Companies in the insurance, financial services and capital market players are likely to report the biggest advances in Q2, according to FactSet.

The tech sector, meanwhile, is likely to grab the most eyeballs, thanks to strong AI demand. Revenue growth for the sector is starting Q2 at its highest level in 18 months, according to Gilmartin’s analysis.