Investing.com — RBC Capital Markets on Tuesday reiterated an overweight on the energy sectors heading into 2025 and upgraded communications services.
The financial sector has posted a strong performance following the 2024 election, with RBC analysts predicting significant tailwinds in the event of a Republican victory. Positive factors for the financial sector include possible corporate tax cuts, an increase in mergers and acquisitions and deregulation.
The sector has seen upward revisions to earnings per share (EPS) and revenue estimates, benefiting from low sensitivity to the stronger US dollar.
“If soft data such as consumer confidence and ISM production show improvement in the new year, as many expect, it seems likely that this sector will benefit as it has historically tended to outperform when both indicators move higher ,” said RBC strategists.
“It is also worth noting that the financial sector outperformed in the 12 months following the last two presidential elections in 2016 and 2020 and saw one of the largest reductions in the effective tax rate after Trump’s tax reform package was passed in 2017.”
Meanwhile, sector valuations have become expensive on an absolute basis within the , although RBC believes they remain reasonable compared to the broader market.
The investment bank also continues to favor the energy sector, describing it as a contrarian choice. Although post-election gains have declined, the sector is still attractive due to strong tailwinds from a Republican victory, attractive valuations and a lower bar for EPS revisions heading into the new year.
Energy’s EPS revisions are less affected by a stronger US dollar, and global energy fund flows are showing signs of recovery.
“The biggest risk we see to our overweight in energy is that the sector underperformed during the 2018 China trade war, along with other commodity and cyclical-oriented sectors of the old economy,” strategists said.
Finally, RBC has upgraded Communication Services to Overweight. The company highlights that the industry’s average price-to-earnings (P/E) ratio is below the market average, and that recent consensus forecasts for 2024 have improved.
Communication Services also benefits from low sensitivity to the strength of the US dollar and tends to perform better when consumer confidence rises.
In terms of valuation, the sector’s average price-to-earnings ratio is significantly below average compared to the broader market, RBC notes, and just slightly above average in absolute terms.
“Overall, the sector is one where the average price-to-earnings ratio within the S&P 500 appears to be rising above its lows on both an absolute and relative basis,” the note said.
“Like the financial sector, communications services also tend to perform better when consumer confidence rises, making it also a potential beneficiary of a brighter mood in the New Year.”
The biggest risk RBC sees with the upgrade is that Communications Services tend to underperform when they are emerging.
