Poor Performance of Utilities, Consumer Staples, and Energy Sectors
According to FactSet data, the S&P 500’s utilities, consumer staples, and energy sectors have been the worst-performing parts of the large-cap benchmark index in 2023. The utilities sector has declined over 10% year-to-date, significantly underperforming the broader index’s 23.6% advance. The consumer staples and energy sectors have also slumped by 2.6% and 4.1% respectively this year.
Utilities and consumer staples are typically considered defensive investment sectors or “bond proxies” due to their ability to mitigate stock-market losses during economic downturns. However, these sectors have been under pressure this year. Rising U.S. Treasury yields and a strong economy have made defensive stocks less attractive compared to government-issued bonds or money-market funds offering enticing returns.
The Impact of Rate Cuts and Earnings Growth Expectations
The recent pivot to rate cuts by the Federal Reserve in 2024 has boosted the utilities and consumer staples sectors. Last week, the utilities sector rose 0.9% while the consumer staples sector saw a 1.6% increase. Meanwhile, the information technology sector advanced by 2.5%, and the communication services sector experienced a 0.1% decline, according to FactSet data.
Looking ahead, Wall Street expects 11.5% growth in S&P 500 earnings-per-share (EPS) and 5.5% revenue growth in 2024. However, there is a wide dispersion across S&P 500 sectors. Some sectors, like energy, are projected to have minimal growth, while sectors like information technology are expected to have significant revenue and earnings growth.
Colas highlights that playing fundamentally weaker sectors assumes more good news on the rate front and is riskier compared to sticking with tried-and-true groups like technology. He notes that health care and big tech-dominated groups such as communication services, technology, and consumer discretionary are expected to show much better than average revenue and earnings growth in 2024 based on FactSet data.
In the market, the Nasdaq Composite finished up 0.6%, according to FactSet data.