NEW YORK: As the second quarter earnings season approaches, investors are eyeing sectors that have been underperforming but may still see growth, regardless of whether the US economy enters a recession this year.
The S&P 500 healthcare sector has declined by 4.7% while the financials sector has dropped by 2% and the energy sector is nearly 9% lower. However, these lagging sectors are now becoming more attractive to investors who are uncertain about the possibility of a US recession.
In June, global fund managers increased their investments in healthcare and banks while reducing holdings in recession-proof assets such as cash and consumer staples companies, according to BofA Global. Large asset managers like BlackRock and Wells Fargo have also identified healthcare as a favored sector for the remainder of the year.
Moreover, some major banks have improved their economic outlooks, with Goldman Sachs lowering the probability of a recession in the next 12 months to 25% from 35% and the Commerce Department revising its estimate for first-quarter GDP growth to 2% from 1.3%. Despite the recent slowdown in job creation, strong wage growth indicates a tight labor market, which will likely lead to the Federal Reserve resuming interest rate hikes later this month.
This increase in borrowing costs is expected to weigh on stocks, and earnings in the S&P 500 are projected to decline by 5.7% in the second quarter. However, despite these challenges, the healthcare sector’s stable earnings and attractive valuations make it an increasingly appealing investment option, especially if the economy slows down in the second half.
The forward price-to-earnings ratio of the healthcare sector is 17.6, compared to the broader S&P 500’s ratio of 20.1. The sector is still benefiting from a backlog of delayed care during the pandemic, and demand is expected to continue growing. As for the financials sector, it is likely to benefit from the Fed’s rate hikes and the belief that the worst of this year’s regional banking crisis has passed.
Companies like LPL Financial Holdings Inc and Morgan Stanley in the wealth management sector are seen as having more growth opportunities than big banks. The earnings reports of major banks are scheduled to be released next week. While a shift away from the megacap technology and growth stocks that have driven the rally in the S&P 500 is not guaranteed, some investors are considering rotating towards healthcare and financials.
The Russell 1000 Growth Index has gained 27.5% year-to-date, whereas the financials and healthcare-heavy Russell 1000 Value has only increased by 2.9%. However, if the rally in megacap stocks continues, their valuations may become stretched, prompting investors to seek opportunities in healthcare and financials.
Overall, there is potential for growth in these sectors as they are currently trading at a discount.
Credit: The Star : Business Feed
