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Tag: S&P 500 Energy Sector Index

  • How Fed rate moves could impact different sectors of the stock market in 2024

    How Fed rate moves could impact different sectors of the stock market in 2024

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    Wall Street seems to agree that U.S. stocks will climb to fresh record highs in 2024. But the most important question for investors may still be the direction and speed of interest-rate moves. 

    Rate-sensitive groups of stocks with lackluster fundamentals, such as financials, utilities, staples, “may be able to outperform, at least early in the year,” if one expects interest rates “to come down quickly and permanently,” said Nicholas Colas, co-founder of DataTrek Research.

    But if “one expects a bumpier ride on the rate front,” then stronger groups, like technology and tech-adjacent sectors “should do better,” Colas said in a Monday client note.

    The S&P 500’s utilities, consumer staples and energy sectors have been the worst performing parts of the large-cap benchmark index so far in 2023, according to FactSet data.

    With an over 10% year-to-date decline, the S&P 500’s utilities sector
    XX:SP500.55
    has significantly underperformed the broader index’s
    SPX
    23.6% advance.

    The S&P 500’s best performing information technology sector
    XX:SP500.45
    was up 56.5% for the same period. But its consumer staples
    XX:SP500.30
    and energy
    XX:SP500.10
    sectors have slumped by 2.6% and 4.1% so far this year, respectively, according to FactSet data.

    Utilities and consumer staples are usually considered defensive investment sectors, or “bond proxies,” because they can help investors minimize stock-market losses in any economic downturn. Companies in these sectors usually provide electricity, water and gas, or they sell products and services that consumers regularly purchase, regardless of economic conditions.

    However, utilities and consumer staples stocks were under a lot of pressure this year. A relentless climb in U.S. Treasury yields in October made defensive stocks less attractive compared with government-issued bonds, or money-market funds offering 5%, especially as the economy remained strong, pushing recession expectations out further.

    Colas expects “weaker groups” to catch a stronger tailwind if rates continue to decline.

    See: Markets are declaring victory over inflation for Powell, and that has some economists worried

    The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    last week booked its biggest weekly decline in a year after the Federal Reserve signaled a pivot to rate cuts in 2024, which helped the S&P 500 score its longest weekly winning streak since 2017.

    The S&P 500’s utilities and consumer staples sectors rose 0.9% and 1.6% last week, respectively, compared with the information technology sector’s 2.5% advance and communication services sector’s
    XX:SP500.50
    0.1% decline, according to FactSet data.

    Earnings growth expectations for each S&P 500 sector in 2024 are indicated below. Sectors to the left of the dotted black line are expected to show better bottom-line results than the S&P 500 as a whole, while those to the right are expected to show weaker earnings growth.

    SOURCE: FACTSET, DATATREK RESEARCH

    Wall Street expects next year to see 11.5% growth in S&P 500 earnings-per-share (EPS), to $244, and 5.5% revenue growth, according to FactSet data.

    However, there is a wide dispersion across S&P 500 sectors. The range goes from 2% revenue and 3% earnings growth for the energy sector, to 9% revenue and 17% earnings growth for the information technology sector, according to data compiled by DataTrek Research.

    “Playing fundamentally weaker sectors therefore assumes even more good news on the rate front,” Colas said, adding that it still is riskier than sticking with “tried and true groups” like technology.

    Moreover, sectors such as utilities, financials and consumer staples are not expected to show 10% earnings growth next year, while health care and big tech-dominated groups like communication services, technology and consumer discretionary, are expected to show much better than average revenue and earnings growth in 2024, said Colas, citing FactSet data. 

    U.S. stocks closed higher on Monday, with the Dow Jones Industrial Average
    DJIA
    building on its all-time high set last week. The S&P 500 gained 0.5% and the Dow Industrials closed fractionally higher. The Nasdaq Composite
    COMP
    finished up 0.6%, according to FactSet data.

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  • Wall Street’s most bullish strategist warns of choppiness in stocks, still sees the S&P 500 touching a record high this year

    Wall Street’s most bullish strategist warns of choppiness in stocks, still sees the S&P 500 touching a record high this year

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    Recent weakness in the U.S. stock market is likely to persist over the near-term, according to Wall Street’s most bullish strategist, who still thinks the S&P 500 is on a path to a record high this year.

    John Stoltzfus, chief investment strategist at Oppenheimer Asset Management Inc., in late July projected the S&P 500 would rise above 4,900 by the end of 2023. That is the highest price target for the large-cap index among 20 Wall Street firms surveyed by MarketWatch in August.

    It implies the S&P 500 would rise above its earlier closing record high of 4,796 reached on Jan. 3, 2022 by the end of the year. The path up, however, could get bumpy.

    “Bullishness [in the stock market] is relatively high while the Fed remains shy of its inflation target,” said a team of Oppenheimer strategists led by Stoltzfus in a Sunday note. They also said, “we persist in suggesting that investors curb their enthusiasm [in the stock market] for a long rate pause or even a rate cut and instead right-size expectations.”

    Expectations that the Federal Reserve is nearing an end to its current interest-rate hiking cycle, as well as optimism around artificial intelligence boosted the U.S. stock market in the first seven months of 2023. However, the rally came to a brief halt in August as investors worried the Fed could be forced to keep rates elevated as a batch of stronger-than-expected economic data and rising oil prices fueled concerns that still-sticky inflation would mean that borrowing costs will stay higher for longer.

    Investors should not brush off those pressures, even through the Fed appears to be nearing the end to its current rate-hike cycle, Stoltzfus and his team said. “The stickiness evidenced in food, services, energy and other prices warrants the Fed remaining vigilant along with a potential for one more hike this year and perhaps another next year,” they said.

    See: When will consumers stop buying more stuff? It’s a key question for the stock market.

    However, Stoltzfus doesn’t see current headwinds for stocks as something that would prevent the S&P 500 from achieving his team’s new peak target.

    Stock-market investors expect this week’s August inflation report to offer more clarity on whether the central bank will continue to ratchet up its fight against inflation. The headline component of the consumer-price index is forecast to accelerate to 0.6% in August from July’s 0.2% gain, while the core measure that strips out volatile food and fuel costs is expected to rise a mild 0.2% from a month earlier, according to a survey of economists by The Wall Street Journal. 

    Meanwhile, a key Wall Street volatility index also pointed to “some choppiness” in the stock market in the near term to keep investors on their toes, said Stoltzfus. The CBOE Volatility Index
    VIX,
    at a level of 13.82 on Monday, hovered around its 12-month low and traded about 30% below its one-year average level of 19.9, and 37% below its two-year average of 21.88 (see chart below). 

    Stoltzfus and his team suggest that investors use market weakness to seek out “babies that get thrown out with the bath water” in periods of volatility. They said the S&P 500 Energy Sector
    XX:SP500.10
    looks increasingly attractive as policy makers in the U.S. and abroad strive to contain inflation and manage economic growth. 

    “We believe that prospects are looking better that the Fed’s success thus far in bringing down the rate of inflation could lead to a [rate] pause next year, thus lessening pressures on economic growth,” the strategists said. An improved economic growth, along with fiscal stimulus from investment in stateside infrastructure projects and stateside chip manufacturing efforts, could contribute to profitability in the energy sector into 2024, the team added. 

    The Energy Select Sector SPDR Fund
    XLE,
    which is seen as a proxy of the energy sector of the S&P 500, has advanced 3.9% year to date versus a 8.5% increase in the price of the U.S. benchmark West Texas Intermediate crude oil
    CL00,
    +0.03%

    CL.1,
    +0.03%    ,
    according to FactSet data.

    Oil futures
    CLV23,
    +0.03%
    BRNX23,
    -0.03%
    traded at their highest levels of the year on Monday morning, a week after Russia and Saudi Arabia caught markets off guard with their output cut extension announcements, but they settled modestly lower on Monday afternoon.

    See: Energy ETFs are outshining the S&P 500, but it’s not just because of the oil rally

    Stoltzfus in late July projected the S&P 500
    SPX
    would rise above its record high by the end of 2023, lifting his year-end price target for the large-cap index to 4,900 from an earlier 4,400 projection from December. It implies a 9.2% advance from where the S&P 500 settled on Monday, at around 4,487.

    See: S&P 500 has a new record high 2023 price target. Here’s a look at Wall Street’s official stock-market outlook.

    U.S. stocks finished higher on Monday, boosted by technology shares as Nasdaq Composite
    COMP
    advanced 1.1%. The S&P 500 was up 0.7% and the Dow Jones Industrial Average
    DJIA
    ended 0.3% higher, according to FactSet data. 

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  • The ‘narrow breadth’ chorus has fallen silent. What broadening participation in stock-market rally means for investors.

    The ‘narrow breadth’ chorus has fallen silent. What broadening participation in stock-market rally means for investors.

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    A wider swath of stocks have joined the S&P 500
    SPX,
    +0.15%    ’s
    upswing after the so-called Magnificent Seven — Apple
    AAPL,
    +0.32%    ,
    Amazon
    AMZN,
    +1.11%    ,
    Alphabet
    GOOG,
    +0.08%    ,
    Microsoft
    MSFT,
    -0.72%    ,
    Meta
    META,
    -2.11%    ,
    Nvidia
    NVDA,
    -0.04%
    and Tesla
    TSLA,
    +0.37%
    — single-handedly propelled the large-cap index into a bull market in early June, with the gauge now up more than 28% from its low notched last October and rising to new highs since April 2022, according to Dow Jones Market Data. 

    Hopes that the U.S. economy could pull off a soft landing and avoid a recession despite the Federal Reserve’s aggressive interest-rate hikes, as well as receding inflation pressures and expectations for the end of the Fed’s monetary tightening campaign, have underpinned a notable expansion in market breadth over the past two months, according Adam Turnquist, chief technical strategist at LPL Financial. 

    The S&P 500 Equal Weighted Index
    SP500EW,
    +0.27%    ,
    which lagged behind the market-cap-weighted S&P 500 index for most of the year, has now kicked back into gear and staged an impressive comeback in July. The equal-weighted index and the S&P 500 each advanced 3.1% this month, according to FactSet data. 

    The equal weighting eliminates the distortion of the megacap components and significantly changes several sector weightings in the S&P 500, including technology, which drops from around 29% on the SPX to only 13% on the equal-weighted index, said Turnquist in a Friday note. Meanwhile, the industrials sector has the biggest increase in weight, jumping from 9% on the SPX to 16% on the equal-weighted index.

    Another way to quantify and compare market breadth is to look at the percentage of stocks on an index trading above their longer-term 200-day moving average (dma), Turnquist said. In general, if a stock is trading above its 200 dma, it is considered to be in an uptrend, and if the price is below the 200 dma, it is considered in a downtrend. Furthermore, a higher percentage of stocks above their 200 dma implies buying pressure is more widespread — suggesting the market’s advance is likely sustainable.

    The chart below shows that 73% of stocks within the S&P 500 are trading above their 200 dma as of July 27, which compares to only 48% at the end of 2022. Moreover, the composition of breadth leadership has turned increasingly bullish. The highest sector readings include technology, industrials, energy, and consumer discretionary.

    “So not only is breadth on the index robust, but cyclical stocks are also leading,” said Turnquist. 

    SOURCE: LPL RESEARCH, BLOOMBERG

    Wall Street often views broadening participation in the stock-market rally as a measure of health and a constructive sign of the sustainability of the bull market. 

    Jimmy Lee, founder and chief executive officer of The Wealth Consulting Group said he is seeing “a lot of money” flowing into areas that are not the Magnificent Seven such as stocks in the industrials, financials, materials, energy and even real-estate sectors.

    The S&P 500’s industrials sector
    SP500.20,
    +0.23%
    climbed 2.9% in July, while the financials sector
    SP500.40,
    +0.44%
    advanced over 4.7% this month. The S&P 500’s energy sector
    SP500.10,
    +2.00%    ,
    which had been the biggest laggard when the rest of the markets exited the bear market in June, jumped 7.3% month to date after the U.S. oil benchmark
    CL.1,
    -0.20%

    CL00,
    -0.20%
    closed above $80 a barrel for the first time since April. 

    Meanwhile, the tech-heavy S&P 500’s communication-services sector
    SP500.50,
    -0.03%
    rose 6.7% in July, while the consumer-discretionary sector
    SP500.25,
    +0.56%
    gained 2.4% and the information-technology sector
    SP500.45,
    +0.13%
    was up 2.6%, according to FactSet data. 

    See: Stocks are on a seemingly unstoppable hot streak, but this bond-market ‘tipping point’ could see it end in a hurry

    Stephen Hoedt, managing director of equity and fixed income research at Key Private Bank, told MarketWatch in an interview that he doesn’t see “any reason to get bearish here with the fundamentals that are underlying,” which gives investors reason to rotate toward the more cyclical areas such as energy, financials and industrials, while broadening the market away from just being concentrated in the megacap technology names. 

    “The growth has been a surprise this year for everyone, so that’s what the market got wrong coming into this year. When I look at growth, nominal GDP growth translates directly into earnings and we’ve seen earnings continue to surprise on the upside,” Hoedt said. 

    Hoedt pointed to the direction of the 12-month forward earnings estimate for the S&P 500 as an important indicator. “As long as the direction of the 12-month forward earnings number for the S&P 500 is going up, it’s really, really difficult to be bearish on the stock market,” he said. “It seems to me that we may start to see another inflection higher in forward earnings revisions that take into account this stronger growth environment that we’re in.” 

    However, the broadening of the stock-market rally and the bullish sentiment were also driving some on Wall Street to believe stocks are overbought and due for a correction. 

    Lee said there’s still too much pessimism out there and too much concern that some investors haven’t chased the market yet. “In the second half of this year, when the Fed does stop raising rates and if the economy stays out of recession, you can see major money — trillions of dollars moving from the money market into equities and other risk assets,” he told MarketWatch in a phone interview on Friday.

    “When that happens, it’s probably going to push valuations even further. So I would imagine when that happens is when you can expect more of a correction to occur, but I think that we still have more room to go before that happens.” 

    U.S. stocks ended higher on Monday, finishing up July on a positive note. Three major stock indexes rallied this month, with the S&P 500 up 3.1% and booking its fifth monthly gain. The tech-heavy Nasdaq Composite
    COMP,
    +0.21%
    gained 4.1% month to date, while the Dow Jones Industrial Average
    DJIA,
    +0.28%
    advanced 3.4%, according to Dow Jones Market Data. 

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  • U.S. stocks finish choppy session with losses, snap 2-day winning streak as investors assess positive economic data

    U.S. stocks finish choppy session with losses, snap 2-day winning streak as investors assess positive economic data

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    U.S. stock indexes ended modestly lower on Wednesday, despite briefly turning positive in the final hour of trading, while data showed steady growth in private-sector jobs and in the service sector, indicating more scope for the Federal Reserve to continue to raise interest rates.

    How stocks traded?
    • The Dow Jones Industrial Average
      DJIA,
      +0.03%
      lost 42.45 points, or 0.1%, to finish at 30,273.87

    • The S&P 500
      SPX,
      +0.21%
      was off 7.65 points, or 0.2%, ending at 3,783.28

    • The Nasdaq Composite
      COMP,
      +18.82%
      shed 27.77 points, or 0.2%, to end at 11,148.64

    On Tuesday, the Dow jumped 825 points, or 2.8%, while the S&P 500 increased 3.1% and the Nasdaq Composite rallied 3.3%.

    What drove markets?

    Wall Street stocks finished in the red after three main indexes bounced back from earlier losses in the final hour of trade, following a strong September private employment report in the morning.

    Data released Wednesday showed that private-sector payrolls rose by 208,000 in September, indicating steady growth and supporting the view that the Fed has enough scope to keep raising interest rates. Economists surveyed by The Wall Street Journal had expected a rise of 200,000.

    The report came two days before the closely watched nonfarm payrolls data issued by the Bureau of Labor Statistics. Investors are eying on it for important guidance on the Fed’s policy stance in the November meeting.

    Friday’s employment report is expected to show the economy added 275,000 jobs in September, compared with 315,000 new positions added in August, according to a survey polled by Dow Jones.

    See: Hiring and job creation seen falling to a 1 1/2-year low in U.S. September jobs report

    “That certainly could move the needle,” said Kristina Hooper, chief global market strategist at Invesco. “Again, it doesn’t mean that it actually is going to change the market, but it could be the catalyst for short term rally if we get a disappointing jobs report.”

    “But keep in mind, that’s just the anticipation of a Fed pivot based on data. But that does not ensure a Fed pivot. And so it could be one of those short-term rallies like the one we saw earlier this week,” Hooper said.

    In other data Wednesday, an ISM barometer of U.S. business conditions in the service sector dipped to 56.7% in September but still showed steady growth and rising employment in a sign the economy is still expanding.

    The U.S. trade deficit in August fell to $67.4 billion, the lowest level since mid 2021, paving the way for a resumption of growth in gross domestic product in the third quarter.

    See: Why investors shouldn’t expect a break from the stock-market whiplash, says this strategist

    The S&P 500 had just enjoyed its largest two day percentage gain since April 2020 on Monday and Tuesday, and the best start to a quarter since 1938, according to Dow Jones Market data.

    The bounce followed three quarters of declines, the worst such run since 2008, during which time the S&P 500 fell 24.8% to a near two-year trough as investors worried that the Federal Reserve’s interest rate hikes to crush inflation would harm the economy.

    Brian Mulberry, client portfolio manager at Zacks Investment Management, believes the volatility in the stocks will continue because markets are getting a very “consistent message” from the Fed.

    “Given what has happened over the last five trading sessions alone, we would be basically telling our clients to tighten your seatbelt a little bit because it’s definitely going to continue to be a bumpy ride,” Mulberry told MarketWatch in a phone interview on Wednesday. “If we get a ‘Goldilocks’ (jobs) report, that would mean decent economic activity is going on. That’s good for earnings overall in the market, but it’s not growing to a point where interest rates would have to be ratcheted up another 125 basis points by the end of the year.”

    See: The stock market is surging as the U.S. dollar retreats. It’s all about bonds.

    One major reason behind the rise early this week was the view that the Fed would pivot away from its aggressive monetary tightening.

    Johanna Chua, chief Asia economist at Citi, said that though U.S economic growth remained in better shape than other countries and Fed officials continued to sound hawkish, the market risked being wrongfooted by any signs that interest rates could soon peak.

    “Even as the overall fundamental setup has not changed… trimming of bearish risk/bearish rates/bullish USD positions has driven a sharp reversal,” Chua said.

    Mary Daly, president of the Federal Reserve Bank of San Francisco said Wednesday that the Federal Reserve needs to keep raising its benchmark interest rate in order to cool inflation that hit a 40-year high earlier this year and has shown little signs of cooling. Atlanta Fed President Raphael Bostic will speak at 4 p.m. Eastern.

    Meanwhile, the OPEC+ group said Wednesday that it will reduce its collective crude production levels by 2 million barrels a day starting next month, the biggest cut since the start of the pandemic. Oil futures headed higher with West Texas Intermediate crude for November delivery
    CL00,

     
    CLX22,

    rose $1.24, or 1.4%, to settle at $87.76 a barrel on the New York Mercantile Exchange.

    The S&P 500’s energy sector
    SP500.10,
    -0.07%
    rose 2.1% following the news, up 12.6% over the last three trading days. According to Dow Jones Market Data, it was the best three-day percentage gain since November 2020 when it gained 16.1%. Shares of Schlumberger 
    SLB,
    +0.77%
    gained 6.3% at the close, while Exxon Mobil
    XOM,
    +1.32%
    shares advanced 4%.

    Companies in focus
    • Shares of Helen of Troy Ltd. 
      HELE,
      -2.75%
      finished 3.4% higher Wednesday, after the consumer products company, with brands including OXO, Hydro Flask and Braun, reported fiscal second-quarter earnings that beat expectations but cut its full-year outlook, as rising inflation has prompted consumers to change their spending patterns.

    • Shares of Monopar Therapeutics Inc.
      MNPR,
      +6.36%
       gained 1.8% after the company said it completed enrollment in a Phase 2b clinical trial evaluating its experimental therapy aimed at preventing severe oral mucositis in patients undergoing chemoradiotherapy for oropharyngeal cancer.

    • Shares of Eiger BioPharmaceuticals Inc.
      EIGR,
      +0.85%
       tumbled 5% after the company said it will not pursue emergency authorization of its experimental treatment for mild and moderate COVID-19 infections.

    • Shares of Lamb Weston Holdings Inc.
      LW,
      +2.45%
       ended 4.2% higher Wednesday, after the potato supplier reported fiscal first-quarter profit that beat expectations, higher prices helped offset a volume decline.

    —Jamie Chisholm contributed reporting

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