Betting U.S. economic indicators will point to accelerating growth next year, Wall Street banks recommend investors raise exposure to economically-sensitive sectors and scale back defensive ones.
A Reuters analysis of 2020 forecasts from 14 major financial institutions found that 10 have "overweight" ratings on industrials or financials, sectors that closely track economic cycles.
Another cyclical sectors, consumer discretionary was the next most recommended, with seven overweight ratings, followed by information technology, with six.
That contrasts with the end of last year, when defensive-leaning healthcare tied with technology as the most recommended sector with virtually the same group of banks, and the number of recommendations for the safe-haven utilities and consumer staples sectors grew from the previous year.
Some of those decisions may have coincided with a sharp sell-off in stocks in late 2018. Defensive sectors outperformed for much of 2019 even after Wall Street recovered from that swoon. But this quarter, defensive names have taken a backseat as the S&P 500, up nearly 28% year-to-date, has steadily blown past old records.
Strategists see S&P 500 gains in 2020 given the U.S. economy, even in its late stage, is expected to grow at a moderate pace and that prospects for global growth are improving.
"If the market's going to trade higher, it's going to be these cyclical sectors that are leading the charge," said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, which has overweight ratings on financials, consumer discretionary and information technology.
S&P 500 industrials have been at the center of worries over the impact of the U.S. trade war with China. An initial trade agreement last week eased some of those concerns and could pave the way for further gains in trade-sensitive shares.
The outperformance of semiconductor shares, which have been lifted by the Phase 1 trade agreement, also points to growing confidence in the economy, said Michael Mullaney, director of global markets research at Boston Partners.
"Semiconductors are the spearhead of cyclical stocks," he said. "They're doing better, which once again tells us that there's this positive backdrop from an economic standpoint."
Strategists recommending financials cited still-attractive valuations, strong bank dividends and expectations the Federal Reserve will hold off cutting interest rates in the near term, and that bond yields will rise.
Consumer discretionary shares gained favor on expectations that consumers, benefiting from a robust labor market, will keep supporting the U.S. economy.
"We've ridden that one pretty hard for pretty long," Wren said. "But right now it's hard to bet against the consumer given the unemployment rate and rising wages."
Technology, which some analysts classify as a cyclical sector, remains a favorite. Areas such as cloud computing and "the internet of things" present long-term investment opportunities, said Nela Richardson, investment strategist at Edward Jones in St. Louis.
"There's multiple pathways to growth in tech," she said. "Tech has a lot of arrows in the quiver."
The S&P 500 technology index, up more than 45% year-to-date, has led sector gains so far this year, followed by the communication services index, up about 32%, and financials, up about 29%.
Even so, Bank of America downgraded technology to market weight from overweight, and UBS named tech as one of its least-favored sectors globally. Bank of America cited the potential for difficulty in longer-term U.S.-China trade negotiations to split technology supply chains between the two countries.
Strategists were also less upbeat on energy and materials, cyclical sectors that are sensitive to fluctuations in commodity prices, which ranked among the least-favored groups heading into 2020.
Even so, they were recommended by more banks than healthcare, communication services, consumer staples, utilities or real estate.
"When the recession drums eventually sound, we will get defensive again," wrote strategists at Stifel, recommending energy and other cyclicals.
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