Inside ETFs: Will your portfolio pass the earnings test?

Earnings season is here, but will your portfolio be cheering or just holding its breath? This is Inside ETFs and we're talking about earnings season. Wall Street is bracing for a near record earnings season, but will it be enough to keep this bull market running? The stakes couldn't be higher. The S&P 500 has bounced back from a rocky start and is now up more than 10% this year. But this rally looks fragile. The Magnificent Seven, its usual engine, is barely participating. If that continues, the other 493 stocks will need to step up and do the heavy lifting. So is your portfolio earnings ready? Well, it's Esau Esposito, head of ETF products at Zacks Investment Management. Well, one of your funds is built around the idea that companies that deliver consistent earnings through recessions tend to outperform over time. So in a potentially volatile earnings season, does that approach act as a hedge? ZACP, the Zacks Earnings Consistent Portfolio, yes, is designed to look at companies that have had consistent or inconsistent earnings over multiple market cycles. So it's not looking at just this quarter's earnings. We're looking at earnings eight quarters into the future. But we're looking for companies that have been through all different kinds of markets over the last 15 years. While earnings growth is cooling across large parts of the markets, including consumer and industrials, meanwhile, chipmakers are expected to post triple-digit earnings growth. So how do you separate the winners from the AI hype? We are very much on a prove it, prove it method, right? We're looking at companies that have had earnings over multiple market cycles over the last 15 years, specifically in ZACP as well, right? We're not going to just invest in a company because it's had great earnings for the last couple of quarters. It's something that we're looking at backwards and then also forwards as well, right? So a particular company like just obviously NVIDIA, the biggest company in the market, right? It doesn't actually make it into the ZACP's earnings consistent portfolio specifically because it hasn't had that consistent earnings over the timeframe we're looking at. And it hasn't been in within that standard deviation of variability that we're looking for as well, right? Some of the earnings can move up and down quite a bit. And then I guess just to piggyback on the current environment with the energy companies, there's essentially no energy exposure in ZACP because of the fact that if you think about their earnings, one quarter can be up a lot. Another quarter can be down. Another quarter could be in the middle. We're looking for that consistency. It's in the name, the consistency over the multiple market cycles. Meanwhile, the biggest stocks have struggled in 2026. Small caps have posted their strongest first half since 1991. But with rates potentially staying higher for longer, can the small cap rally keep going? Is there still opportunity there? Our products, SMIZ, our ZAC small and mid-cap ETF, which invests in mid-caps as well, that particular ETF kind of wavers in between small and mid across all six style boxes. So we are seeing a lot of interest in that product, mainly because I think people are looking for other pockets of opportunity outside of the big names in the market. I feel like a lot of these names have gotten really expensive and people are kind of sitting on their hands waiting for something to happen. And small and mid-caps, I think, is providing the avenue for investors to kind of move out of those names that they've appreciated in 30%, 40% over the last couple of years and into some other potential opportunities. Well, more on those pockets of opportunities. Investors are looking beyond US tech for finding bargains in Europe and Asia. European companies are expected to deliver another quarter of strong earnings growth. So is the case strengthened for international exposure? It's just you need to be smart about where you're investing, right? Investing in just maybe the index might not be the best opportunity for returns. So we're looking at a, you know, we're looking, you know, our ETF has about 160 names. So not small, but not super concentrated. But it gives you exposure in the market that you actually want to be in. And it's in companies that have strong earnings and good earnings growth as well. So finally, Sal, the S&P 500 dividend yield is hovering near historic lows as companies pour profits into AI instead of returning more cash to shareholders. So does that AI spending boom create a challenge for your income focus strategies? We're going to be giving return on capital to target a specific distribution rate for those ETFs. So a little bit different from the income products of, you know, some of our competitors that use options or leverage. We're looking and we're specifically focusing on the portfolio itself and the inside and the construction of the portfolios so that, you know, you're going to be targeting a specifically, you know, relatively high yield, right? Because people are looking for income still, right? I think we have so many retire. I think, you know, 50 million boomers are something that people are looking for, you know, income specifically. So we're trying to offer two products that give you thoughtful portfolio construction, but also you're not feeling like you're missing out on the 20% options overlay strategies where, you know, if you take a look at those, a lot of them get into this, you know, you're getting back half of what you're putting in. So essentially you don't really realize, hey, I'm getting this yield, this crazy yield, but, you know, the NAV on the strategies are actually taking you down half the actual price. So that's kind of how we feel about that space. That was Sal Esposito from Zacks Investment Management. Don't forget, you can watch more videos on Reuters.com.