The performance of the stock markets in 2024 will be mainly driven by companies and sectors related to artificial intelligence (AI).
As of mid-June, the Information Technology (IT) and Communications Services sectors are up more than 20%, and the Bloomberg Magnificent 7 Index is up more than 30%, accounting for 71% of the S&P 500 Index’s annual returns. yield. In contrast, the remaining nine sectors have underperformed relative to the broader sector.
According to Wells Fargo strategists, this tech-driven rally is fueled in part by optimism about the future potential of AI. However, profits have also been an important factor, with the Communications Services and Information Technology sectors growing 44% and 25% year-on-year respectively in the first quarter. The Bloomberg Magnificent 7 Index’s gains rose 60% over the same period.
“While valuations have risen, fundamentals are at least partially supporting the price increase,” analysts wrote in a note.
Looking ahead, Bloomberg consensus data points to a broadening of profitability from the fourth quarter onwards. Wells Fargo said its four favorite sectors – Energy, Healthcare, Industrials and Materials – are expected to see higher earnings growth rates than the S&P 500 Index later this year and into 2025.
“Greater balance in profitability could lead to broader market participation in the coming quarters,” analysts added.
Given the strong increase this year in the Information Technology and Communication Services sectors, the strategists recommend reducing profits and reducing the weightings to neutral.
“We would benefit from recent weakness in our favorable sectors (Energy, Healthcare, Industrials and Materials), where we see improving earnings growth, sustainable demand prospects and attractive risk-reward profiles,” they concluded.
Wells Fargo noted that upcoming events, such as the November election and possible slowdowns in disinflation, could cause periods of market volatility in the coming months.
However, they believe that as the Federal Reserve moves to cut rates and the economy transitions to a sustainable growth phase, market pullbacks could provide opportunities to diversify sector exposure within U.S. large-cap stocks.
“US Large Caps remain our single favorite stock class. However, a market pullback may provide opportunities to broaden exposure to other share classes,” the note said.
