The behavior of the stock market in 2024 has been mainly influenced by companies and industries related to artificial intelligence (AI).
As of mid-June, the Information Technology (IT) and Communication Services sectors have seen gains of over 20%, and the Bloomberg Magnificent 7 Index has seen growth of over 30%, contributing to 71% of the S&P 500 Index’s returns since the beginning of the year. On the other hand, the remaining nine sectors have shown weaker performance compared to the overall S&P 500 Index.
Analysts at Wells Fargo suggest that the rise in technology stocks is partly due to positive expectations about the future impact of AI. However, corporate profits have also played an important role, with the communication services and information technology sectors recording profit growth of 44% and 25%, respectively, compared to the first quarter from last year. Profits on the Bloomberg Magnificent 7 Index have increased by 60% over the same period.
“Although stock valuations have risen, underlying business performance is, to some extent, supporting the rise in stock prices,” the analysts noted in their report.
Future projections based on Bloomberg consensus data indicate that profitability is expected to increase starting in the last quarter of the year. Wells Fargo has indicated that its four preferred sectors – Energy, Healthcare, Industrials and Materials – are likely to experience stronger earnings growth compared to the S&P 500 index later this year and into 2025.
“A more even distribution of returns may lead to higher market share in the coming periods,” the analysts said.
Due to the significant gains recorded in the Information Technology and Communication Services sectors since the beginning of the year, strategists advise reducing profits and adjusting investment levels to a more standard position.
“We recommend taking advantage of the recent decline in the value of our preferred sectors (Energy, Healthcare, Industrials and Materials), which are showing signs of increasing earnings, consistent demand and a favorable balance between potential risks and rewards,” they said in their closing remarks.
Wells Fargo has noted that upcoming events, such as the November political elections and possible delays in the reduction of inflation, could cause periods of instability in the stock market in the near future.
However, they maintain that if the US Federal Reserve decides to reduce interest rates and the economy enters a phase of stable growth, any downturn in the market could present opportunities to diversify investments across different sectors of US large-cap stocks.
“We continue to prefer US large-cap stocks as the only choice for equity investing. However, any market downturn could provide opportunities to expand investments into other equity asset classes,” the report suggests.
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