Utilities Emerge as 2024's Hottest Trade, Outpacing Tech Stocks

Utilities are now hottest trade of 2024, and Bank of America says keep buying instead of tech

Utilities -- not tech -- are now the hottest trade on Wall Street, according to Bank of America. Savita Subramanian, equity and quant strategist at Bank of America, on Monday upgraded the sector to overweight from market weight, saying investors should buy utilities -- instead of tech -- as they can outperform in a choppy market as the Federal Reserve starts to lower interest rates. "On the heels of softer employment data, our economists' revised outlook has terminal rates slated to reach 3.25% by 2025 - the dividend yield of most Utes and [real estate] companies are more attractive given their inherent inflation protection," she wrote. XLU YTD mountain XLU Utilities is actually the sector leading the S & P 500, up more than 19% in 2024 even as much of the attention this year has gone to the high-flying mega-cap tech stocks due to the promise of artificial intelligence. Subramanian sees the outperformance continuing. She anticipates higher volatility over the next several years -- not just the next several months -- will increase the importance of quality and income stocks over growth names. "Gains in the 2010s were mostly from growthy stocks enjoying multiple expansion amid low to negative real rates," she wrote. "Going forward, income should contribute a larger share of total return- especially since our valuation framework suggests paltry price returns - low single digits - over the next decade. (In 2010, valuations predicted 10%+ price returns p.a.)." "Quality and income are the new growth and P/E expansion," she added. "Note that the total return of S & P 500 Utilities (the "tortoise") has been in line with Nasdaq's (the "hare") over the long term." Here are some ways for investors to play it: The Utilities Select Sector SPDR Fund (XLU), a market cap weighted fund with roughly $18 billion in assets, has a 22% total return in 2024. The fund charges 0.09% in fees. Vanguard Utilities ETF (VPU) , a $6.4 billion fund market cap weighted fund, has a total return of 22%. The fund has an expense ratio of 0.1%. iShares U.S. Utilities ETF (IDU) , with $1.4 billion in assets, has a 22% total return. The fund charges 0.4% in fees. Fidelity MSCI Utilities Index ETF (FUTY) , with $1.4 billion in assets, has a total return of 22%. The fund charges 0.084% in fees. Invesco S & P 500 Equal Weight Utilities ETF (RSPU) , an equal-weighted fund with just $317 million in assets, has a roughly 20% total return in 2024. Its expense ratio comes in at 0.4%. Separately, as for the tech high-fliers, Subramanian is a lot less bullish. Information technology is the worst-performing S & P 500 sector this quarter, down about 7%, even as it's higher this year by 18%. But the strategist said she is not buying the dip. "We remain underweight Information Technology despite arguments that it has gotten so beaten up," she said. "The sector trades at record EV/Sales, is cyclical not secular and with Standard & Poor's new index-cap rules expected to be implemented, Tech's concentration risk introduces the risk of passive selling pressuring mega-cap names." -- CNBC's Jesse Pound contributed to this report.

Bank Of America Warns Energy Could Be 'Cheap For A Reason,' Highlights Utilities As Defensive Play - SPDR Select Sector Fund - Energy Select Sector (ARCA:XLE), SPDR Select Sector Fund - Utilities (ARCA:XLU)

Energy downgraded to "market-weight" as supply discipline risks weakening, and the sector now has the most negative earnings revision ratio Bank of America has reshuffled its sector outlooks, raising Utilities to "overweight" while downgrading Energy to "market-weight." The changes come as elevated volatility and policy uncertainty drive a recalibration of investment strategies. According to Savita Subramanian, Bank of America's head of U.S. equity strategy, the shifting economic and political landscape has altered the risk-reward profiles of these key sectors. Utilities: Defensive Hedge With Growth Potential Subramanian argues that Utilities, as tracked by the Utilities Select Sector SPDR Fund XLU, long regarded as a defensive sector, have become increasingly attractive in the current rate environment. As economic uncertainty persists, utilities offer stable fundamentals and a built-in defensive hedge against inflation. One of the core factors behind the Bank of America's upgrade is their higher dividend yield, which has become more appealing given the revised outlook for interest rates. Bank of America economists now predict terminal interest rates will reach 3.25% by 2025, lower than previous expectations, and this environment is favorable for income-generating assets like utilities. Further boosting the outlook for utilities is their exposure to artificial intelligence (AI) technologies. As companies in the sector begin to integrate AI for efficiency and operational improvements, there could be longer-term growth opportunities that hadn't been factored in before, the analyst says. Utilities are now benefiting from AI in ways that enhance productivity, making them not just a defensive play but also an indirect AI beneficiary, she adds. Energy: From Value To Value Trap? In contrast, Bank of America's downgrade of the Energy sector, as tracked by the Energy Select Sector SPDR Fund XLE, comes amid concerns over political risk and weakening fundamentals. Although energy companies have improved in terms of quality and discipline compared to prior cycles, the sector faces rising uncertainty that could undermine its stability. Subramanian warns that the supply discipline that has supported oil prices could start to unravel if the political environment changes. This coincides with Bank of America's commodity strategists lowering their oil price forecasts, casting doubt on the sector's growth prospects. "Energy stocks might look cheap, but they could be 'cheap for a reason,'" she notes. One of the most worrying signals is the sector's earnings revisions: Energy now holds the "most negative earnings revision ratio of all sectors," indicating that analysts are increasingly pessimistic about future earnings growth. Moreover, Energy's strong performance in recent years could turn into a liability if the political winds shift. Regulatory pressures, including potential changes in drilling policies and climate regulations, are key risks that could weigh heavily on the sector's outlook. Avoiding The Tech Dip: Underweight Information Technology Bank of America remains cautious on the beaten-down Information Technology sector, maintaining its "underweight" rating, despite arguments that the recent selloff has created a buying opportunity. Subramanian highlights that Tech stocks still trade at record valuations, particularly in terms of enterprise value to sales (EV/Sales), making the sector vulnerable to further downside. "Technology is cyclical, not secular," Subramanian asserts, meaning that its performance is closely tied to broader economic trends, not immune to them as some investors might hope. Another concern is the upcoming changes in Standard & Poor's index cap rules, which are likely to impact the largest Tech names. These changes could introduce concentration risk, leading to passive selling that could pressure some of the sector's mega-cap stocks. Read now: US Yield Curve No Longer Inverted: Why This Time The Recession Scenario Might Be Different For Investors Image created using artificial intelligence via Midjourney. Market News and Data brought to you by Benzinga APIs