As we enter the heart of second quarter earnings season, all the major indices sold off two percent or more last week, and volatility has increased within the equity markets over the past month even as stocks are almost exactly at the same level. This week started with a significant test as the Chinese market had its biggest plunge since 2007 as its main stock index sold off more than eight percent overnight before Monday's open. Safe to say that the market is entering a period of unease at the moment.
The collapse in profits from the energy and commodity sectors are also a key reason that there has been no year-over-year growth in either earnings or revenues in the first two quarters of the year. Factset is now predicting this disappointing trend will continue into the third quarter of the year. Low interest rates and robust M&A activity have supported the market up to this point, but it is hard to get enthused about the overall market at these levels with the paucity of earnings growth. But, the sector I am recommending stocks in today continues to be a bright spot in the market and is producing the best year-over-year growth in earnings and revenues in the market right now. It is the key reason the sector has been a leader in the market over the past year, and why it has the best growth prospects in the market right now.
Unfortunately, it is just not commodity and energy companies delivering disappointing growth. Outside of financials and healthcare, the other eight industry sectors of the market are currently delivering negative or slightly positive earnings and revenue growth. The opposite is true for health care where the main biotech index is up over 50% in the past twelve months even factoring in last Friday's four percent plunge within the biotech sector.
Obviously, valuations in health care are not as compelling as they were a year ago. In addition, some of the highflyers within this sector are very susceptible to any bad news. This was demonstrated Friday when one of the largest biotech plays, Biogen Idec (NASDAQ: BIIB), plunged more than 20% on the day after issuing disappointed forward guidance. The stock was selling for just under 25 times this year's earnings before the plunge and was vulnerable to any sort of bad news.
