Market participants may have positioned in May and gone away, but the analysts have remained active. They continue to update the earnings outlook, and the first few reports from S&P 500 (NYSEARCA: SPY) have taken a toll. Currently, consensus figures for Q2, Q3, Q4 and the year continue to trend lower, putting the index at risk of posting negative earnings growth this year. That event would be bearish for the market but not necessarily for all sectors.

The consensus figures for the broad market are moving lower, but not all sectors are feeling the same pain. The top 3 sectors for Q2 will report earnings growth, and their outlook is holding steady if not trending higher. 

The Consumer Discretionary Sector Will Be #1 In Q2? 

The Consumer Discretionary Sector (NYSEARCA: XLY), odd as it may sound, will be the leader in Q2. According to Factset, the sector is expected to post 26.8% earnings growth, and the consensus is increasing. The chart is also bullish, showing a possible reversal that could take the market up 25% to reclaim post-pandemic highs. The caveat is that this sector is heavily skewed in favor of its top 2 holdings: Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA). Amazon accounts for nearly 30% of the total index, and its growth is boosted by AWS, the cloud, AI, and business spending. AWS is not the most significant segment at roughly 17% of revenue, but it is growing the fastest at 16% YOY and is largely unrelated to “consumer discretionary” spending. 

Likewise, Tesla owes its success to shifting trends and not strength in discretionary spending. Looking at the numbers 3,4, 5, and 6 positions, the outlook isn’t so great. McDonald’s (NYSE: MCD) is another potential winner for Q2. Still, Home Depot (NYSE: HD), Lowes (NYSE: LOW), and Nike (NYSE: NKE) are experiencing significant downward revisions to their outlook, and HD and LOW are expected to post robust declines in revenue and earnings. The takeaway is that Amazon, Tesla, and McDonald’s look good for Q2, but the sector as a whole will likely disappoint. 

The Communications Sector Is Another Hot Trade For Q2 

The Communications Sector (NYSEARCA: XLC) is another hot trade for Q2 and will likely perform better broadly. The sector is heavily weighted in favor of Meta (NASDAQ: META) and Alphabet (NASDAQ: GOOG), which account for 45%, but other top holdings include T-Mobile (NASDAQ: TMUS) and Netflix (NASDAQ: NFLX), which are both expected to grow. Meta has been soaring recently due to its dual tailwind of improving using metrics and “efficiency.” That story is amplified by the new Threads app, which poses a severe threat to Twitter. Facebook is #2 on Marketbeat’s list of Most Upgraded stocks and has been in the top 5 all year. Google parent Alphabet and Netflix are also on the list. 

The Communications Sector ETF is already deep in reversal. The next resistance point is near $72 or about 10% above the current share price, which may be hit by the end of the reporting season. Meta and Alphabet results are the next most apparent catalyst for the market; they report at the end of July. 

The Real Estate Sector: Hot For Income Investors 

The 3rd hottest sector by earnings growth will be the real estate sector (NYSEARCA: XLY). It is expected to grow by 6.2% and help fuel steady dividends across the sector. The sector is also better diversified, with the top holding accounting for only 12% of the total. The ETF yields about 3.7%, with shares trading near long-term lows and higher can be found within the holdings. The market has bottomed, and support is near $36; if it can get above critical resistance points, it could rally into the end of the year. The 1st critical resistance point is near the long-term EMA at $37.70; the next is near $40.