Stocks in this left-behind sector are expected to rally as much as 33% - MarketWatch

Stocks in this left-behind sector are expected to rally as much as 33% - MarketWatch

At this point in the stock-market rally, you have probably seen headlines warning that sentiment is becoming so positive that we’re getting back to the “everything bubble” that preceded the brutal declines of 2022. But a quick look at the 11 sectors of the S&P 500 shows that all but three are trailing their levels at the end of 2021.

And this year’s worst-performing sector may be ripe for long-term investors as the Federal Reserve moves closer to the end of its cycle of raising interest rates.

Here’s how the S&P 500 SPX, +0.27% sectors have performed through July 18, with dividends excluded. Figures for the full S&P 500 and three other broad indexes are at the bottom of the table.

| S&P 500 Sector or Index | 2023 price change | 2022 price change | Price change since end of 2021 | Forward P/E | Forward P/E – Dec. 30, 2022 | Forward P/E – Dec. 31, 2021 |
| Information Technology | 47.7% | -28.9% | 5.0% | 27.9 | 20.0 | 28.2 |
| Communication Services | 39.3% | -40.4% | -17.0% | 17.5 | 14.4 | 21.0 |
| Consumer Discretionary | 37.1% | -37.6% | -14.4% | 28.5 | 21.5 | 34.2 |
| Industrials | 11.6% | -7.1% | 3.6% | 19.1 | 18.4 | 21.3 |
| Materials | 8.0% | -14.1% | -7.2% | 17.8 | 15.7 | 16.6 |
| Real Estate | 3.0% | -28.4% | -26.3% | 17.3 | 16.9 | 24.7 |
| Financials | 2.1% | -12.4% | -10.5% | 13.5 | 12.9 | 16.1 |
| Consumer Staples | -0.4% | -3.2% | -3.5% | 20.0 | 20.6 | 21.4 |
| Healthcare | -3.0% | -3.6% | -6.4% | 17.2 | 17.7 | 17.2 |
| Energy | -6.5% | 59.0% | 48.6% | 11.1 | 9.8 | 11.1 |
| Utilities | -7.1% | -1.4% | -8.4% | 17.1 | 18.8 | 20.4 |
| S&P 500 | | | | | | |

DJIA,

+0.35%
COMP, +0.10% NDX, +0.01%

Some notes about the data:

- The high-flying S&P 500 information-technology sector is up 48% this year, but it is up only 5% since the end of 2021, and its forward price-to-earnings ratio is slightly lower than it was at the end of 2021.
- The most expensive sector, based on forward P/E, is consumer-discretionary, which is trading significantly below its P/E at the end of 2021.
- The energy sector remains cheapest by P/E and is one of four sectors that are down this year.
- The utilities sector has been this year’s worst performer, with a 7% decline. It is the third cheapest by forward P/E, after the energy sector and the financial sector, which faces pressure from the decline in value for securities investments due to the increase in interest rates, as well as rising costs for deposits and other funding.

To set the stage for a screen of utility stocks, let’s first look at projected growth rates for sales and earnings per share for the 11 sectors and the full S&P 500. In the following table, the sectors remain in the same order as above. The expected compound annual growth rates (CAGR) for sales and earnings per share (EPS) run through calendar 2025, using weighted consensus estimates for 2023 among analysts polled by FactSet as a baseline:

| Sector | Two-year estimated sales CAGR through 2025 | Two-year estimated EPS CAGR through 2025 |
| Information Technology | 4.6% | 15.0% |
| Communication Services | 5.7% | 16.2% |
| Consumer Discretionary | 7.9% | 18.6% |
| Industrials | 6.6% | 13.4% |
| Materials | 0.1% | 7.2% |
| Real Estate | 5.6% | 6.1% |
| Financials | 4.2% | 11.2% |
| Consumer Staples | 3.9% | 9.1% |
| Healthcare | 5.8% | 9.8% |
| Energy | -1.5% | 3.1% |
| Utilities | 4.0% | 7.7% |
| S&P 500 | 5.2% | 12.1% |
| Source: FactSet | | |

The consumer-discretionary sector (which includes Amazon.com Inc. AMZN, +1.77%) is expected to show the highest growth rates for sales and earnings through 2025.

While the utilities sector ranks near the bottom for expected revenue growth, it is expected to increase EPS at a decent 7.7% rate.

And the bond market may be signaling good times ahead for utility stocks. The inverted yield curve, with 10-year U.S. Treasury notes TMUBMUSD10Y, 3.761% yielding 3.77% and three-month Treasury bills
TMUBMUSD03M,

5.435%
yielding 5.40%, shows that institutional investors in the bond market expect interest rates to come down.

Those investors have loaded up on long-term bonds because bonds’ market values rise when interest rates fall. Investors either want to lock up a decent yield for the very long term or make a tidy profit by selling bonds after the Fed reverses course and begins lowering interest rates.

And declining interest rates will presumably have a similar effect on prices for other income-producing assets, including utility stocks.

Stock screen

Going back to the first table, above, if the S&P 500 utilities sector were to return to its forward P/E valuation at the end of 2021, that alone would make for a 19% gain.

One easy way to invest in the sector is the Utilities Select Sector SPDR exchange-traded fund XLU, +0.94%, which holds the same 30 stocks with a weighting meant to match that of the index.

For investors considering individual utility stocks, here are all 30 in the S&P 500 sector, sorted by implied upside potential for the next 12 months, based on consensus price targets among analysts polled by FactSet:

| Company | Ticker | July 18 price | Consensus price target | Implied 12-month upside potential | Two-year estimated sales CAGR through 2025 | Two-year estimated EPS CAGR through 2025 | Dividend yield |
| AES Corp. | | | | | | | |

NEE,

+0.06%
SRE,

+0.65%
ES,

+1.16%
PPL,

+1.50%
ETR,

+2.14%
DTE,

+1.08%
AEP, +1.35% DUK, +1.08% CMS,

+1.85%
NI,

+1.54%
D,

+1.96%
AWK, +0.96% FE,

+0.68%
WEC,

+1.38%
XEL,

+1.27%
CNP,

+1.04%
EXC,

+0.67%
ATO,

+0.99%
PCG,

+1.80%
AEE,

+0.93%
EVRG,

+1.05%
PEG, +1.05% NRG, +1.22% LNT,

+1.07%
SO, +1.07% EIX,

+1.53%
CEG, -0.98% ED,

+1.11%
PNW, -0.23%

Click on the tickers for more about each company, fund or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Dividend yields are in the far right-hand column. While some of the yields might not seem very high in the current market, don’t forget how recently banks were paying only a bit more than zero on savings deposits. If and when the U.S. economy slows, interest rates will drop and most utilities operating within regulated markets will probably keep paying and raising their dividends.

Keep in mind that in the brokerage industry, stock ratings and price targets are based on 12-month outlooks. That can be a short time frame for a long-term investor. If you are considering any individual companies for investment, you should do your own research to form your own opinion.

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