Who Needs the Mega-Caps? Blue Chips in Focus

 | Jul 25, 2023 03:53PM ET

  • Sector rotation has been ongoing for the last two months while the spotlight has been on the massive tech stocks

  • We identify and profile a pair of cyclicals and one defensive company with unusual earnings reports on tap

  • Pay close attention to management guidance and economic outlooks as the second half presses on

    • The market has a different feel today than it did two months ago. No longer are the mega-caps powering the S&P 500 higher. Rather, small caps, cyclicals, and even defensive niches are providing a blue-chip boost. That’s highlighted perhaps most starkly in the Dow Jones Industrial Average's recent winning streak. As we embark on the heart of earnings season—when all of the tech-related stalwarts report Q2 results—traders will weigh whether the market environment since June 1 has been a corrective blip or if we are indeed in a new regime with emerging leadership.

    An Earnings Season Pulse Check/h2

    That’s anyone’s wager, and we will know a whole lot more by the end of next week. For now, the second-quarter reporting period has been so-so. The beat rate is, ballpark, at the 5-year average while top-line numbers have been more on the disappointing side, according to FactSet’s latest tally. Meanwhile, the early Q3 guidance gauge leans bearish. Corporate execs are shy about setting expectations anywhere close to high, so we expect more soft bars to be set.

    GDP Growth Persists Amid Unimpressive “Soft” Data/h2

    That cautious corporate theme echoes a broader trend: soft data, such as survey reports and confidence polls, are running light while hard data, like GDP, CPI, retail sales, and labor market indicators, appear more robust, according to the Citi Economic Surprise Index’s internals. Investors have been looking past this bifurcation, and after a stellar Q1 earnings season, it might just be a matter of time before corporate optimism turns up.

    What clues does our team see today? Let’s sift through it together by spotting three old-school stocks: one from the Industrials sector, a Utilities name, and a Materials company synonymous with American industrialism.

    Union Pacific Bearish DateBreaks Factor/h2

    Let’s begin this trip by climbing aboard the rails. Union Pacific Corporation (NYSE:UNP), a transport stock within the Industrials sector, has been riding high. Shares are near their best marks since last September despite concerns about ebbing economic growth. Few industries are as cyclically exposed as Rail Transportation, and the group already took a hit last week when CSX (NASDAQ:CSX) issued its first bottom-line miss in two years.

    Will UNP chug along the same track? Well, the company’s earnings date was originally expected to take place on July 20, so this event is later than usual, which could be a bearish indicator. Heading into this week, shares were higher in 10 of the previous 11 sessions, so momentum has been in like, well, a freight train. A bad report could stall the rally rather quickly.