SPYG ETF: Q4 Earnings & 2023 Outlook Support Recovery

Since fundamental factors have begun to support corporate and business performance, the outlook for growth ETFs like SPDR Portfolio S&P 500 Growth ETF (NYSEARCA:SPYG) has turned positive. The better-than-expected fourth-quarter results and outlook for 2023 also demonstrate that the business environment is not as challenging as many had thought it would be a few months ago. A number of economic indicators point to a declining likelihood of a recession, so there is also no risk of an immediate economic downturn. A high trading volume also indicates that there is strong demand for growth stocks and that the upward trend is most likely to continue.

The Q4 Earnings and the 2023 Outlook Support the Upward Trend

I advised investors in December to buy growth stocks and ETFs like SPYG to capitalize on potential gains in 2023 and beyond. Fortunately, the stock market has surged this year, with growth stocks leading the way. Several factors, including falling inflation and optimism about the Fed’s pivot, have contributed to the stock market’s recovery so far in 2023. Investors were particularly surprised by the stronger-than-expected performance of the technology sector, which is the epicenter of growth stocks and accounts for more than 30% of SPYG’s portfolio. According to FactSet data, the information technology sector outperformed all other S&P 500 sectors in terms of earnings surprises in the fourth quarter. Despite Apple’s (AAPL) underperformance, 79% of technology firms outperformed expectations in the fourth quarter.

Despite missing estimates, Apple’s stock has increased by about 18% this year, more than double the growth of the S&P 500 index. Apple’s price movement demonstrates that investors have ignored Q4 results in favor of improving fundamentals. The reopening of the Chinese market was a significant factor in improving investor sentiment. Microsoft (MSFT), the second-largest technology company, exceeded revenue and earnings expectations in the fourth quarter. It anticipates positive year-over-year growth in 2023 and double-digit growth the following year. Furthermore, double-digit earnings growth is anticipated in 2023 for companies that provide payment technology, like Visa (V) and Mastercard (MA).

The healthcare sector, which comprises more than 19% of SPYG’s portfolio, was also among the best performers in the fourth quarter, with 74% of healthcare businesses outperforming expectations. For example, UnitedHealth Group (UNH), one of SPYG’s top ten stock holdings, outperformed analysts’ expectations, and the company expects adjusted net earnings to range between $24.40 and $24.90 per share in 2023, up from the projected $21.18 per share. In contrast, the consumer discretionary sector, the third-largest contributor to SPYG’s portfolio, reported mixed earnings, with 67% of companies exceeding expectations. However, due to the likelihood of better-than-expected economic trends, investors have expressed confidence in consumer discretionary growth stocks. The Consumer Discretionary Select Sector SPDR Fund, which effectively represents the consumer discretionary sector, has seen a nearly 17% increase in share price this year. Year to date, Amazon’s stock has increased by more than 10%, while Tesla’s stock has soared by a staggering 80%. Overall, it appears that growth companies will earn more than many people predicted a few months ago.

Low Risk of Immediate Economic Slump and Hard Landing

Since the odds of a recession were over 70% a few months ago, investors expected a severe economic downturn and recession in 2023. However, the threat of an impending economic downturn was mitigated by stronger-than-expected labor market data and exceptionally strong retail sales figures. The US PMI Composite Output Index also saw improvement in January and continued to do so in February, rising to its highest level in eight months. A PMI score above 50 denotes expansion or growth in the US manufacturing sector.

The fact that US GDP projections have been significantly revised upward also suggests that the economy is strengthening. For example, the Atlanta Fed has raised its forecast for US GDP growth in the first quarter several times in recent weeks. The organization now forecasts 2.5% GDP growth in the first quarter. Because of strong retail sales and a tight labor market, JPMorgan economists also raised their first-quarter GDP forecast from 1% to 2%. The National Association of Business Economists (NABE) has reduced the probability of a recession from 75% to 56%, and Goldman Sachs has lowered it to 25%.

Valuations and High Liquidity

Growth stocks valuations are currently well below their five-year average, trading at about 19 times projected earnings. The forward price-to-earnings ratio of growth stocks fell significantly in 2022, owing to a sharp drop in stock prices rather than earnings. In 2022, tech stock earnings increased by slightly more than 3% year on year. Furthermore, as economic trends improve, earnings in 2023 are likely to be much higher than many had anticipated. As a result, I believe growth stocks can continue to appreciate in value.

Along with favorable valuations, a revised earnings outlook, and stronger-than-expected economic trends, SPYG’s high liquidity suggests that the uptrend will continue. Seeking Alpha’s quant system also upgraded SPYG’s liquidity grade from C to A+ due to the significant increase in trading volume. SPYG’s average daily dollar volume over the last three months was 114.3 million, representing a 6,243.80% increase over the median of all ETFs. Volume is an excellent predictor of market health and future price movement. Rising volumes and an upward trend in stock prices typically portend the continuation of the trend.

In Conclusion

Although growth stocks have recovered from their previous lows, they remain in the “buy zone” for long-term investors. History also shows that after every bear market, there is always a solid and long-lasting bull run, and investors who buy stocks near the bottom of the selloff reap significant long-term rewards. Current market trends and future fundamentals also suggest that the worst is behind us and that stocks will recover in the coming months. In light of this, SPYG, which has a high beta and a low expense ratio, might be a great option for riding the recovery phase.