Investors embrace riskier sectors as stocks extend rebound
Equities tied to tech and economic cycles outperforming rest of market
Stock sectors that tend to gain when investors are embracing risk or expecting faster growth have performed better than others as major indexes approach last year’s peaks, boosting some analysts’ confidence the rally will continue.
Fast-growing technology and internet stocks, along with sectors tied to economic cycles such as industrial and energy stocks, pushed the S&P 500 to a four-month high Wednesday and helped the benchmark equity gauge erase last week’s fiveday losing streak.
Analysts are monitoring sector performance as the first quarter comes to an end because outflows from equity funds and major indexes’ recent wobbles around key technical levels have raised questions about the durability of this year’s rebound. The S&P 500 surged above 2800 Wednesday, and some analysts are waiting to see if the index can stay above that level for the first time since last quarter’s rout.
Sector returns so far this year show investors flocking back toward riskier corners of the market. Even during last week’s slide, safer sectors also fell and continued lagging behind, giving some analysts confidence that major indexes can hold steady even if the rally pauses again.
“It’s been risk-seeking behavior on the upside and risk-seeking behavior on the downside,” said Liz Young, director of market strategy at BNY Mellon Investment Management. Although slowing global growth and uncertainty about trade policy could push investors back toward safety, analysts say the Federal Reserve’s pause in raising interest rates has lifted confidence in growth and cyclical stocks. The S&P 500 is up 12% for the year and on track for its best quarter since September 2009, pulling it within 4.1% of last year’s alltime high.
With Boeing shares falling Monday and Tuesday, technology stocks have overtaken industrials as the market’s leader this year. Tech shares are up 16.1% so far in 2019.
Industrial shares that were on track to lead the benchmark equity gauge on a quarterly basis for the first time since 2013 entering the week are still up 15.8%, followed closely by 15% gains for the real-estate and communication-services groups. Energy stocks are up 14%. Meanwhile, health-care stocks—the market’s best-performing group last year—have risen 6.2% in 2019, hurt by fears of more stringent regulation. Other sectors that tend to gain when investors are nervous, the consumer-staple and utility groups, are up 8.4% and 9.6%, respectively.
Those have generally moved with riskier sectors lately, though utilities and makers of consumer goods stayed relatively flat when the S&P 500 fell each day last week.
However, some analysts are confident steady earnings will let those groups catch up to more volatile sectors moving forward.
S&P 500 companies’ earnings grew 20% last year. In the first quarter of 2019, profits are expected to fall from a year earlier, which would mark the first such drop since 2016, according to FactSet. But the utility and health-care sectors are expected to pace the broader index with modest earnings increases from a year earlier.
When companies begin reporting first-quarter results next month, some analysts expect sectors with more stable results and larger dividends to rise more than others. Even within groups, some analysts expect investors to prioritize companies with more consistent revenue increases as signs of a slowing economy mount.
“You’re going to start to see the separation between those who can drive growth and those who may not be able to or may be too expensive,” said Darrell Cronk, president of the Wells Fargo Investment Institute.
Still, many of the sectors that have powered this year’s rally are less expensive, a reminder of how far those groups tied to economic growth had fallen last quarter.
Industrial, energy, materials and financial stocks all have lower price/earnings ratios than the S&P 500, according to FactSet data based on profits from the past year.
Even the technology and communication-services groups have valuations roughly in line with the broader market, giving some analysts hope that the early-year strength in those areas could last.