By The S&P 500 is on the verge of reaching record levels, presenting a lucrative opportunity for investors to join the rally. Although certain sectors have fallen behind the overall market performance, they now offer a chance to buy in and potentially profit.
For the year, the S&P 500 has surged approximately 23%, only 1.6% away from its all-time closing high. This impressive gain includes a notable 1.3% increase on Wednesday, prompted by the Federal Reserve’s suggestion that interest rates may no longer rise and could potentially be cut in 2024.
This indication from the Fed has instilled confidence in the market, reassuring investors that the economy can continue to grow despite the 11 rate hikes implemented since March 2022. Consequently, stocks sensitive to changes in demand for goods and services have received a major boost.
Moreover, high-growth technology companies are poised to benefit from lower interest rates, as they increase the present value of future profits. These types of companies are valued based on their potential to generate substantial profits in the years ahead.
However, it is essential to note that not all stocks within these categories are currently worth pursuing. The industrials sector of the S&P 500 has recently reached new record highs, and the tech sector has surged over 50% this year alone. Consequently, these stocks have become relatively expensive and face increased risks if their earnings fail to meet expectations.
Instead, investors should consider companies that have fallen behind in performance, as they present a more enticing proposition. Tom Essaye of Sevens Report suggests that lagging sectors like real estate investment trusts (REITs), staples, and utilities are likely to outperform in the near future.
Historically, these sectors have struggled throughout the year due to investors preferring stocks with greater potential for growth in a healthier economy. However, there has been a noticeable recent shift in momentum, with these previously overlooked sectors starting to gain traction. As a result, investors are rebalancing their portfolios and adding these undervalued names.
Industries such as utilities, which offer stable dividends rather than rapid growth, are particularly appealing. On Wednesday, the Utilities Select Sector SPDR Fund outperformed the S&P 500, surging almost 4%. However, despite this strong performance, it still remains down approximately 7% for the year.
In conclusion, there is still ample opportunity to capitalize on the ongoing S&P 500 rally. By focusing on sectors that have previously lagged behind, investors can potentially tap into undervalued stocks with considerable upside potential.
Room for More Gains in Utility Stocks
The declining yields on 10-year Treasury debt present a promising opportunity for investors in utility stocks. If the trend continues, the dividend yields on these stocks will become even more attractive compared to the 10-year Treasury note.
At present, the fund’s dividend yield stands at 3.4%, slightly lower than the 3.9% yield of the 10-year Treasury note. However, the annual increase in dividend payments by utility companies makes them an appealing investment option. Unlike government bonds with fixed interest payments, utility providers consistently raise their dividend payouts.
The growth in earnings of utility providers is expected to continue due to the construction of new renewable energy plants. Operating in states that allow them to maintain a certain return on these expanding assets, utility companies are set to experience financial gains.
According to Dennis DeBusschere from 22V Research, there is a pattern of mean reversion in defensive sectors such as utilities, consumer staples, and real estate investment trusts as bond yields decline.
While the Charles Schwab US REIT Exchange-Traded Fund has outperformed the S&P 500 this year, it still trails by double digits. However, it experienced a significant boost of nearly 4% on Wednesday when bond yields dropped. With a dividend yield of 3.8% and consistent yearly earnings growth since 2020, this fund has seen its dividend payments rise alongside increasing rents.
On the other hand, the Vanguard Consumer Staples Index Fund is down around 1% this year but recorded a gain of 1.9% on Wednesday. Its dividend yield is currently at 2.6%, with continuous growth in dividend payments since at least 2016. Analysts predict further increases in dividends next year, supported by a projected 7% growth in earnings. Additionally, slight sales growth is expected to contribute to higher profit margins.
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