There is nothing easy about forecasting financial markets, and when combined with a President who changes his mind in a matter of moments on policies that may a have lasting impact on sectors, industries, or specific companies, it becomes that much more challenging.
Three weeks into Trump 2.0 we felt it was as good a time as any to review our sector recommendations. We feel being overweight the Financials, Industrials, Utilities and Energy sectors remains a prudent strategy. The deregulation story is well known, but should it fully come to fruition, Financial firms should operate in a less constrained environment, opening up capital market activity. There’s no doubt that tariffs are going to play a large role in the Industrial sector, but the fact that a large portion of the funds previously passed by Congress should roll out will aid the Industrials who have seen significant margin expansion already.
Unlike at any previous point in the last 25 years, the Utilities sector has a secular growth story with significant need for additional power generation, and like it or not, the Energy sector is going to play a bigger role than renewables in meeting those needs. Energy investments should likely be more focused on the natural gas side rather than oil and if non-traditional investments are to be made nuclear seems like an attractive option. Afterall the new Secretary of Energy was on the board of a nuclear energy company before accepting his new role.
Favoring Staples over Discretionary hasn’t paid off but the bar is high for the consumer to repeat its strong 2024. Technology is in a similar situation but what worries me more is a slowdown in growth rather than an outright decline. Valuations are elevated and for a sector that makes up more than 30% of the index, it doesn’t seem all that crazy to dial back exposure some. As with all of our thinking if the facts change, we are happy to change our recommendations.
Our research provider Strategas' Recommended Sector Weights:
Overweight: Financials, Industrials, Utilities, Energy
Neutral Weight: Health Care, Communications, Consumer Staples
Underweight: Discretionary, Technology, Materials, Real Estate.
Financials – We are Overweight given strong fundamentals and secular tailwinds associated with the new administration.
Rationale: The outlook for the sector has certainly improved post-election, particularly for capital markets activity, and the possibility for right tail risk from deregulation has increased with the election outcome (material de-regulation initiatives led by Treasury Secretary Scott Bessent are already underway). Over 90% of Financials stocks are in an uptrend.
Risks: Returns were pulled forward in anticipation of the deregulation story and perhaps the idea that the Fed may be done cutting rates could hinder economic activity.
Industrials – We are Overweight due to secular tailwinds from reshoring, defense spending, and electricity infrastructure demand.
Rationale: The sector sits at the center of “De-Globalization,” which will have broad implications as long-held operating conventions – from trade and resource procurement to tech & IP partnerships and defense alliances – are reoriented. Lastly, fiscal spending on infrastructure is expected to rise, supported by bipartisan initiatives.
Risks: Certain globally oriented subindustries, like Machinery, are more exposed to risks associated with potential trade tensions. Also, cost growth in many segments remains higher than nominal activity levels.
Utilities – We are Overweight given the combination of both defensive characteristics and secular growth tailwinds from increased domestic power demand.
Rationale: While the sector does have some defensive hedge properties, it has become increasingly correlated with the AI story as future electricity demand has taken a step function leap higher.
Risks: Persistently high or rising bond yields would compete with the sector’s divided yield and weigh on its price action.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
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