Sanghamitra Saha
·4 min read
Wall Street has been in great shape this year. The S&P 500, the Dow Jones and the Nasdaq have advanced 8.3%, 3.6% and 7.8%, respectively. The S&P 500 has risen in 16 of the last 19 weeks, advancing about 25% over that period. However, many investors have overvaluation concerns after such a stupendous rally.
The S&P 500′s valuation is in the 95th percentile vs. history, but Bank of America says investors shouldn’t worry, as quoted on CNBC. S&P 500 valuations are pretty full at the current 22X or 23X earnings but not extreme, per Deutsche Bank's chief global strategist.
In the ongoing bull market, technology stocks have been at the forefront, driven by an unexpected surge in artificial intelligence interest among investors. However, with the rally expanding over the last few months, sectors beyond technology have started to reclaim prominence, indicating a significant enhancement in market breadth.
Against this backdrop, some investors may be a bit clueless about finding sectors that are currently hot. For them, we have presented four sectors that boast an upbeat Zacks Rank. These sectors and their ETFs could be great picks now.
Construction – Rank #1 – iShares U.S. Infrastructure ETF (IFRA)
The Fed is likely to cut rates in late 2024. Last week, the Federal Reserve Chair Jerome Powell told a U.S. Senate committee that the central bank is “not far" from being confident that inflation is declining toward the 2% target, which would make rate cuts possible.Any rate cut is a plus for the construction sector, which is a debt-heavy one.
Notably, the construction industry displayed considerable resilience amid broader macroeconomic headwinds last year. Despite challenges in the U.S. economy, construction activity continued to thrive, reinforced by various factors driving both residential and nonresidential construction spending. The Biden-Harris Administration also announced about $4 billion in support for 14 key transit construction projects across the United States, which makes the space even more appealing.
Industrial Products – Rank #2 – Industrial Select Sector SPDR ETF (XLI)
The ISM Manufacturing PMI in the United States dropped to 47.8 in February 2024 from 49.1 in the previous month and marked the 16th successive period of decline in manufacturing activity. However, demand has started to rebound, with production becoming more stable compared to January as companies gear up for expansion.
Manufacturing GDP declined to 40% in February from 62% in January. Notably, only 1% of sector GDP had a PMI at or below 45%, indicating less manufacturing weakness compared to previous months. None of the top six industries by contribution to manufacturing GDP had a PMI at or below 45% in February, showing improvement over the previous month (read: Is US Manufacturing Space Improving? 4 Sector ETFs Look Decent).
Medical – Rank #4 – Health Care Select Sector SPDR ETF (XLV)
The sector boasts a safe-haven status amid the market crisis. The tensions in the Middle East, overvaluation concerns in the equity market and the fate of the Magnificent Seven stocks (which have been responsible for the recent stock market rally) caused global markets to be volatile. Against this backdrop, medical/healthcare investing makes sense.
The job growth in the sector remains decent. Although the sector is normally viewed as a defensive one, some corners of it have started displaying growth aspects and benefit from advances in technology. Medical Devices is one such area (read: Medical Devices ETF Hits 52-Week High: Stocks to Watch).
Computer & Technology – Rank #5 – Technology Select Sector SPDR ETF (XLK)
The technology sector has been grabbing attention this year because of the continued artificial intelligence (AI) boom and strong corporate earnings. The sector has significantly contributed to earnings expansion in the last two quarters, with this momentum largely attributed to the "Magnificent Seven."
This trend is expected to continue through the first quarter of 2024. Additionally, the anticipation of interest rate reductions later in the year is bolstering this sector's outlook. Given the technology sector's dependence on borrowing for accelerated growth, lower interest rates make it more cost-effective to secure additional funds for future projects.
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Technology Select Sector SPDR ETF (XLK): ETF Research Reports
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
Health Care Select Sector SPDR ETF (XLV): ETF Research Reports
iShares U.S. Infrastructure ETF (IFRA): ETF Research Reports
