Will Real Estate Sector Spinoff Impact S&P 500?

On September 19, the S&P 500 is expected to feature the addition of a new sector. According to S&P Dow Jones Indices, “The real estate industry group will be elevated to the sector level, effective in the S&P US Indices in September 2016. . . and it will become the 11th GICS sector.” How will the removal of the real estate companies impact the expected earnings growth for the S&P 500 Financials sector going forward?

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For Q3 2016, the spinoff of the real estate companies will have a slight negative impact on earnings growth for the Financials sector. As of today, the sector is projected to report earnings growth of 1.0%. Excluding the real estate industry group, the estimated earnings growth rate for the Financials sector falls to 0.3%.

However, starting in Q4 2016, the spinoff of the real estate companies will have a slight positive impact on earnings growth for the Financials sector. From Q4 2016 through Q3 2017, the Financials sector is projected to report higher earnings growth in each quarter after the removal of the real estate companies.

Financial Sector Impacts

The expected earnings growth rate for the Financials sector is expected to be higher over the next four quarters after the spinoff of the real estate industry group because the aggregate earnings growth of the remaining three industry groups in the sector is expected to be higher than the aggregate earnings growth of the real estate industry group during this period.

The estimated average growth rate of the real estate industry group for this time frame (Q4 2016-Q3 2017) is 9.1%. The estimated average growth rate of the remaining three industry groups in the Financials sector for this time frame (Q4 2016-Q3 2017) is 13.1%. Of these three remaining industry groups, the insurance industry group is expected to report the highest average earnings growth over this time frame (Q4 2016-Q3 2017) at 28.0%.