Investors generally pay less attention to their portfolios in the summer. This summer, that was probably a blessing.
For those who logged back in after Labor Day, the summer stock market may have looked rather ho-hum. The S&P 500 equity index was basically flat from July 1 through September 3, ticking up 0.01%. In reality, it was a wild ride to 0.01%. The S&P 500 fell 8% between July 16 and August 5, then rebounded 9% by August 30.
Not much may have changed in the end, but all the ups and downs did mask an important shift. During the first half of the year, a handful of mega-cap growth stocks—mainly those with links to artificial intelligence (AI)—were the rising tide lifting all boats. Since July 1, however, it’s been unsexy industries like utilities taking the lead. From July 1 through September 4, the S&P 500 Value Index gained 7% while the tech-heavy S&P 500 Growth Index declined 2%.
Overall, investors still seem cautiously confident, as there’s little evidence the economy is plunging toward recession. But Niladri “Neel” Mukherjee, chief investment officer of TIAA Wealth Management, warns that the recent volatility has forced equity investors to be more discriminate. They must “reexamine key economic fundamentals, including corporate earnings projections, in an environment where high interest rates, a slowing economy and a softening labor market all serve as pressure points,” he writes in the September issue of CIO PerspectivesOpens in a new window.
With this in mind, Mukherjee and his team performed a sector-by-sector analysis of the stock market to gain a better sense of what’s happening now and what investors might expect going forward. Read on for a summary, and look for the full discussion hereOpens in a new window.
Consumer
The retail sector shows a widening gap between lower- and higher-end consumers. The result: more bargain hunting, fewer one-off shopping trips, and more bundling of purchases. All of this favors big-box retailers over smaller chains and specialty shops, according to Mukherjee. He and his team are also bullish on home improvement stores. Sales of hardware and home furnishings are usually tied to home sales, and there’s optimism that Federal Reserve rate cuts in 2025 will lead to yet lower mortgage rates and thus a stronger real estate market.
Financials
Large-cap, money-center banks have significantly outperformed their small-cap peers this year. Regional bank profitability has been hindered by high lending costs and concerns about their exposure to commercial real estate, according to Mukherjee. That said, whenever Fed rate cuts occur, it should help small and mid-size banks’ profit margins.
Industrials
The industrial sector stands to benefit from the most important trends shaping the global economy—climate transition, infrastructure investments and the AI-driven surge in electricity demand. “Electrical suppliers continue to see growth from data centers, mega projects, and utility spending,” Mukherjee writes, “while aerospace suppliers are benefitting from continued growth in global passenger traffic and a shortage of new aircraft.”
Communications
In the communications space, large digital platforms continue to post strong earnings growth while the legacy media companies (i.e., cable TV) keep struggling. “Advertisers are shifting dollars away from legacy outlets” and toward the best-known digital brands, Mukherjee writes.
Technology
The technology space is now divided into two groups: those exposed to AI and those that aren’t (at least not yet).
AI spending remains strong. The mega-cap “hyperscalers”—companies operating massive global networks of data centers and cloud computing—keep increasing spending to incorporate next-generation technologies. Producers of products used by AI data centers (such as ethernet, liquid cooling, connectors, GPUs and high-capacity memory) are seeing revenue growth accelerate. “Cybersecurity companies continue to report solid growth, driven by a threat environment that may be worsened by AI,” writes Mukherjee.
Away from AI, business is more subdued. Enterprise software vendors report that demand has stabilized after a period of spending cuts by customers. Commodity semiconductor players, such as those providing chips for PCs and autos, are reporting sluggish sales growth as high interest rates weigh on consumer demand.
Health care
Market growth within health care has been lackluster post-Covid. One recent bright spot has been GLP-1 obesity and diabetes drugs, whose market is expected to grow to $150 billion by 2029—a compound annual growth rate of 30%.
Historically, healthcare stocks experience elevated volatility during election years, as investors brace for potential policy changes. The good news this year, according to Mukherjee, is that “outside the implementation of drug pricing reform from the Inflation Reduction Act (IRA), the political rhetoric has been somewhat benign as candidates focus on larger macro-economic and social issues.”
Utilities
Utilities have outperformed the S&P 500 year to date (+21% total return versus +18%). Utility stocks tend to pay high dividends, and the prospect of Fed rate cuts has made their dividends more attractive, relative to bonds, for yield-hungry investors. Another positive for electric utilities: AI. “AI-related data center demand is beginning to have a material impact on U.S. power consumption,” Mukherjee writes.
Click hereOpens in a new window to read the full version of September’s CIO Perspectives. For more insights on the market and economy, and to discuss the implications for your investment portfolio and financial plan, please schedule a meetingOpens in a new window with a TIAA advisor.