Has the rally arrived to invest in stocks?

The S&P 500 is down 13% this year, and you've probably found yourself in a state of limbo, waiting to see if your stock investment shows signs of life or falls further. Well, don't wait any longer: those signals are right under our noses, and some stocks could benefit from any recovery more than most.

What signs of life has investment in shares shown?⚠️​

In April and May, that is, the first two months of the second quarter, investment bank analysts reduced their earnings per share estimates (EPS) for S&P 500 companies by an average of 1,3%. That compares to an average cut of 2% right now in a quarter over the last five years, and an average of 3% over the last 10. That makes this quarter's cut quite small, a good sign for the company. investment in shares.

Another good sign for stock investing: analysts have been raising their EPS forecasts (by 0,3% on average) for the second half of the year. First-quarter EPS hikes off earnings season surprises, and analysts' overall earnings forecasts for 2022 have risen nearly 1% over the past two months.

But what about inflation and interest rates?​

Given the current macroeconomic environment dominated by rising interest rates, high inflation, and Russia's war in Ukraine, we might think that this year's equity divestment would also be accompanied by upward estimate cuts. But with EPS forecasts rising and share prices falling (meaning its price-to-earnings ratio (TO START WITH...) has fallen), investing in US stocks now represents a better opportunity than we would have had months ago.

Also, in a analysis we published in April we suggest that the inflation had surpassed its peak. This could mean that future interest rate hikes this year and next will not be as large as some investors expect. And since higher interest rates generally make investing in stocks less attractive than other assets, lower rates could give stocks another boost.

How do we approach the situation in investing in stocks?​

We can take a two-pronged approach, focusing on investing in US stocks with momentum and quality. Momentum is important because of the rising earnings estimates, if they turn out to be correct. They are generally followed by rising stock prices when companies report earnings. And quality is important because this year's sell-off may present us with investment opportunities in stocks of "high-quality" companies, that is, those with a track record of high and stable profitability, at a discount.

To invest on the safe side, we can look at the sectors where analysts are raising earnings estimates the most. At this time, the sector Energy, materials, industry, real estate and finance are favorites. Analysts believe these sectors will do better than they predicted just two months ago.

¿How do we take advantage of this stock investment opportunity?里​

There are countless ETFs that allow us to buy in each of these sectors. To name a few, we could invest in the Energy Select Sector SPDR Fund (XLE) for exposure to investing in US energy industry stocks, the Materials Select Sector SPDR Fund (XLB) to buy in the US materials sector; he Industrial Select Sector SPDR Fund (XLI) for American industrialists; and the Financial Select Sector SPDR Fund (XLF extension) for US finance, including real estate.

We carry out an analysis with the free tool finviz, where we look for large US companies ($10.000+ billion market cap) that have good quality metrics:

1. Operating margin greater than 25%
2. Return on Equity (ROIC) and Positive Payout Ratios
3. Sales growth of more than 10% annually for the last five years.

We also benchmark against share price performance, looking for companies whose shares have fallen 20% or more this year to narrow the list down to 20 companies where there might be a stock investment opportunity right now.