Recession-proof stocks are leading the market’s latest upward trend after a challenging April, driven by two sectors that usually excel during economic downturns. Since mid-April, when the S&P 500 reached its recent low, Utilities have surged nearly 12%, marking all their gains for the year so far. In the same timeframe, Consumer Staples stocks have increased almost 5%, while the S&P 500 overall is up about 2.7%.
Wall Street strategists suggest that these two sectors are now rebounding after a weak start to 2024. Given their poor performance over the last year within the S&P 500, Truist co-chief investment officer Keith Lerner sees this recent rise as investors shifting towards sectors that haven’t yet benefited much from the market rally.
“Defensive” Sectors Shine as Market Rebounds
The Utilities sector, in particular, was trading at its largest discount relative to the S&P 500 from a valuation standpoint since 2009, indicating a potential buying opportunity for these traditionally “defensive” sectors.
Lerner mentioned that as the markets have risen significantly since October, there is a tendency among investors to move towards more defensive stocks to secure profits and hedge against potential market corrections. This rotation is also driven by the sectors’ potential to catch up or remain stable if the market faces downturns.
The increase in Utilities stocks is also supported by fundamental factors; the sector’s earnings have grown 26.7% this quarter compared to last year, the second-highest growth rate among all sectors. Additionally, the growing interest in artificial intelligence and electric vehicle projects could further drive demand for electricity.
Macroeconomic factors have also played a role. The recent rise in Utilities, a sector sensitive to interest rates, aligns with market reactions to the Federal Reserve’s indications that another rate hike is unlikely. This has caused the 10-year Treasury yield to drop about 20 basis points from its high in 2024, benefiting a sector that typically declines as yields rise.
Recent economic data has shown signs of weakening, with a disappointing jobs report and a contraction in manufacturing activity in April, raising investor concerns about a potential economic slowdown. Morgan Stanley’s chief investment officer, Mike Wilson, suggested that investors might consider increasing their exposure to defensive sectors like Utilities and Consumer Staples if weak manufacturing data persists.
While Utilities and Consumer Staples have been among the top performing sectors over the past month, it’s uncertain if this trend will continue. According to Charles Schwab senior investment strategist Kevin Gordon, the market is currently showing mixed signals with different sectors leading at different times, making it difficult to determine a clear market direction.
