By According to a recent report by Sevens Report Research, U.S. stocks in underperforming defensive sectors are expected to stage a comeback in the coming months. The report predicts that fears of an economic slowdown will drive Treasury yields lower and increase demand for safe-haven assets in equities.
In the past month, defensive stocks in utilities, healthcare, and consumer staples sectors experienced pressure as Treasury yields rose following the U.S. government’s successful avoidance of a shutdown. Additionally, investors anticipated the Federal Reserve would maintain higher interest rates due to a strong U.S. economy.
These defensive stocks, often referred to as “bond proxy” equities, have historically appealed to investors due to their higher dividends and the replacement of lower bond yields. However, they have become less attractive as some risk-free assets’ yields have started to rise. As a result, these defensive stocks are now relatively less appealing compared to U.S. Treasury bonds and money-market funds.
Year-to-date, the S&P 500 Utilities Sector XX:SP500.55 has dropped by nearly 17.2%, the Healthcare Sector XX:SP500.35 has decreased by 3.2%, and the Consumer Staples Sector XX:SP500.30 has seen an 8.2% loss. Conversely, the technology-heavy S&P 500 Communication Services Sector XX:SP500.50 has surged by 46.3%, and the Information Technology Sector XX:SP500.45 has risen by nearly 40%, according to FactSet data.
In conclusion, with an impending growth scare on the horizon, defensive stocks in underperforming sectors may offer opportunities for investors. As Treasury yields lower and the demand for safe-haven assets increases, utilities, staples, and healthcare sectors could see a resurgence in the coming months.
The Attractiveness of Defensive Sectors in the Stock Market
The recent underperformance of defensive sectors in the stock market has led to some stocks being valued at levels not seen since before the pandemic, according to industry experts. For instance, the utilities sector is currently trading at a forward price-to-earnings ratio (P/E) of 14.7, the lowest it has been since 2018. Likewise, the consumer staples sector is also trading at a P/E ratio of 18, which is the lowest level it has reached since before the pandemic, as reported by Sevens Report Research.
This low valuation makes these sectors particularly attractive in the long-term, especially when considering the scarcity of cheap options in the market. It raises the question of whether investors believe there will be a notable economic slowdown that will impact Treasury yields, potentially pushing them lower and increasing demand for companies in the defensive sectors. These industries have historically remained in demand even during economic downturns.
While it is possible that this idea of a “growth scare” may be premature, some investors are cautiously taking advantage of the favorable conditions by investing cautiously on the long side. If a growth scare does occur, it could prove beneficial for both defensive sectors and longer-dated bonds. Given the recent declines in these sectors and bonds, there is finally an attractive risk-reward opportunity available.
See: Will Israel-Gaza war sink stocks and shake the global economy? Watch oil prices.
On Monday, U.S. stocks were trading higher as Treasury yields retreated following geopolitical uncertainty surrounding the Israel-Hamas conflict. The S&P 500 increased by 0.6%, the Nasdaq Composite rose by 0.7%, and the Dow Jones Industrial Average advanced by 0.5%, according to FactSet data.
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