These are the 5 stock market sectors that leading Wall Street firms are most optimistic about in 2024
- Most investment firms expect US equities to rise despite an uncertain growth outlook.
- However, some parts of the market look much more attractive than others.
- Here are the five sectors that Wall Street is especially bullish about this year.
Wall Street is bullish about US stocks broadly heading into 2024, but it has no problem with picking favorite sectors within markets.
After all, there's usually a canyon-sized gap in performance between leading and lagging sectors, and 2023 was no exception.
A pair of growth-oriented groups — information technology and communication services — dominated last year. Their respective gains of 56.4% and 54.4%, which were boosted by falling inflation and interest rates, made the S&P 500's 24.2% rise look modest by comparison. Many investors doubted tech heading into the year, but several firms made a contrarian call that paid off handsomely.
On the flip side, four sectors sorely disappointed investors — especially considering that they were among the Street's top picks for 2023. Utilities brought up the rear with a 10.2% loss, while energy and consumer staples also retreated 4.8% and 2.2%, respectively. Healthcare, which the majority of investment firms polled in late 2022 were bullish on, finished roughly flat at 0.3%.
Top investment firms had a mixed record with their sector recommendations last year — but 2024 is a new year that could very well go according to script.
Business Insider compiled calls from 12 investment firms heading into 2024 and determined which sectors had the highest net recommendation score by taking the number of bullish ratings and subtracting bearish ratings. For example, the healthcare sector had a positive rating from six firms and a negative rating from three firms, so its net score for this exercise was plus-three.
Below are the top sector picks for the next 12 months, along with their 2023 returns, which firms are optimistic or pessimistic about them, the consensus thesis, and a summary of the firms' views.
1. Information Technology
2023 return: 56.4%
Firms optimistic about the sector: BMO Capital Markets, Goldman Sachs, RBC Capital Markets, Societe Generale, Truist, UBS
Firms pessimistic about the sector: Bank of America
Consensus thesis: Technology is a high-quality sector with strong earnings growth and a defensive tilt that makes it appealing in an uncertain economy — provided that valuations hold up.
Sector summary: Last year's top-performing sector can deliver an encore in 2024, according to half of the dozen firms surveyed for this story.
Technology tends to outperform when interest rates are lower, as they're expected to be this year. Plus, many companies in the group are defensive, meaning that they're less susceptible to an economic slowdown since they can generate their own growth. Societe Generale expects tech to help drive earnings growth this year, and they're far from alone in their optimistic view.
"We recommend owning stocks that offer both fundamental growth and strong returns on capital based on our economists' outlook for stable economic growth and interest rates," strategists at Goldman Sachs wrote in their 2024 outlook note. "At the sector level, Info Tech screens as the most resilient sector in these kinds of macroeconomic environments."
Tech is a broad, diverse sector that can appeal to all types of investors. It contains software companies, many of which are fast growers with lofty valuations, but they can also provide an element of safety because they're less economically sensitive. By contrast, hardware firms tend to rise and fall with the economy, though they're often cheaper than their high-flying peers.
UBS is bullish about software stocks, given their defensive attributes that allow them to grow earnings in a slowing economy, though they're not crazy about the rest of the sector.
Bank of America is more concerned about the group, arguing that it's overcrowded and expensive considering that it faces risks like de-globalization and government regulation.
2. Energy
2023 return: -4.8%
Firms optimistic about the sector: Bank of America, Goldman Sachs, JPMorgan, RBC Capital Markets, Stifel
Firms pessimistic about the sector: BMO Capital Markets
Consensus thesis: Energy is remarkably cheap and will benefit from a rebound in oil prices.
Sector summary: After leading the market in back-to-back years, energy got beaten down in 2023 as oil prices receded, causing investors to reallocate capital accordingly.
However, energy firms appear to be too cheap to ignore. The sector was historically inexpensive in the late fall, according to Goldman Sachs, which found that its relative valuation was in the fifth percentile since 1990. Its counterparts overwhelmingly concurred.
"We prefer Energy which has attractive valuations, strong earnings revisions trends, and attractive dividend yields," strategists at RBC Capital Markets wrote regarding the group.
JPMorgan strategists wrote: "Energy offers an attractive risk/reward opportunity given cheap valuation, inherent operating leverage, and potential hedge to rising geopolitical tensions."
Although energy is economically sensitive, it's uniquely positioned to act as a hedge against an escalation of global conflicts. Oil supply would be disrupted if wars in Ukraine or Israel worsen, which could cause prices to spike. Bank of America expects Brent crude oil prices to reach an average of $90 in 2024, which is just below Goldman's estimate of $94.
The lone dissenting view is BMO Capital Markets, which is straying from the energy sector given its negative momentum. A possible exception are large integrated oil stocks, the firm said.
3. Financials
2023 return: 9.9%
Firms optimistic about the sector: Bank of America, BMO Capital Markets, Deutsche Bank, Stifel
Firms pessimistic about the sector: N/A
Consensus thesis: Financials are historically inexpensive, considering that its biggest challenges are likely in the rearview mirror.
Sector summary: This sector gave the market a serious scare last March when regional banks, namely Silicon Valley Bank and First Republic Bank, imploded in alarming fashion.
But the chances of widespread financial collapse are now minimal, Bank of America noted, adding that regional banks make up just 2.5% of the group. Despite what their valuations would suggest, the firm's strategists wrote that financials are high quality with low levels of leverage.
BMO went as far as to say that the group is "more hated now than 2009," which was the depths of the financial crisis, and called the sector "the best value proposition in US stocks by a long shot." The Canadian firm was seconded by Germany-based Deutsche Bank, which think the sector will be the biggest winner after a brief economic downturn.
"They are already priced for a recession," Deutsche Bank strategists wrote about financials.
4. Communication Services
2023 return: 54.4%
Firms optimistic about the sector: RBC Capital Markets, Societe Generale, Truist
Firms pessimistic about the sector: N/A
Consensus thesis: Communication services will be a top beneficiary from lower interest rates and bond yields since valuations aren't too stretched.
Sector summary: Few sectors were hit as hard as communication services in 2022 by rising interest rates, which were necessitated by out-of-control inflation. The growth-heavy group's valuations got crunched as central banks scrambled to put a lid on rampant price increases.
The script flipped last year as inflation fell faster than feared, which meant the market could price in interest rate cuts. Communication services went neck and neck with tech for the top sector of 2023, and a trio of investment firms see even more upside ahead as rates finally fall.
"We've been getting more interested in Communication Services recently due to attractive valuations and a tendency to outperform when 10-year yields fall," RBC Capital Markets strategists wrote regarding the sector.
While maintaining momentum will be a challenge, Truist expects both communication services and technology to succeed again in 2024, as does Paris-based Societe Generale.
"Relative price trends have deteriorated modestly, but it still screens as positive overall from a quantitative view," Truist strategists wrote.
5. Healthcare
2023 return: 0.3%
Firms optimistic about the sector: Goldman Sachs, JPMorgan, Morgan Stanley, Societe Generale, UBS, Wells Fargo Investment Institute
Firms pessimistic about the sector: Bank of America, Deutsche Bank, Truist
Consensus thesis: Healthcare is a top choice for antsy investors since it offers high-quality, defensive growth — but government regulations on drug prices are a serious overhang.
Sector summary: The thesis for healthcare is eerily similar to that of last year, before the sector fell flat with a lackluster return of less than half a percentage point.
However, healthcare can live up to the hype this year as economic growth slows, several firms say. Those cautious about the economy favored this group, which can enjoy resilient demand in any economic environment given the noncyclical nature of its goods and services.
"Healthcare has underperformed YTD versus the market but is showing relative strength against broader defensives and remains our preferred defensive sector," Morgan Stanley strategists wrote. "From here, we see the cohort as a late-cycle outperformer given its defensive and growth properties."
Strategists at JPMorgan said they favored the sector "for its defensive growth properties, peaking rates, high screening across key characteristics (i.e. growth, value and quality) and reasonable valuation," which Morgan Stanley found are in the bottom 30% of historical levels on a relative basis since 1995.
Those cheap valuations come despite the fact that the sector's fundamentals have already fallen to the lowest levels since late 2022 and the depths of 2020, according to Goldman Sachs.
UBS sees healthcare broadly benefiting from innovation in the coming years, though it's focused on pharmaceuticals in the near term. Morgan Stanley also likes pharma due to its enticing relative valuations, in addition to firms in biotechnology and healthcare providers & services.
Investment firms that are fading healthcare are either bearish on defensives, in Deutsche Bank's case, or are worried about some combination of valuations and government regulation. Bank of America thinks some pockets of healthcare are pricey, though it also cited drug price regulations as a chief concern — especially in an election year. Truist's equity team feels the same way.
"The sector is subject to policy risk during election year," Truist strategists wrote, adding that its relative price trends and earnings momentum are still subpar.