Wells Fargo analysts downgraded the utilities sector to neutral from overweight on Thursday following a strong rally year-to-date (YTD).
Analysts had already upgraded Utilities at the end of 2023 when negative sentiment was high and technical indicators suggested the sector was oversold. However, conditions have changed and Utilities have returned 25.8% so far this year, outperforming the S&P 500’s 19.1%.
The Wells Fargo team cited three key reasons for the downgrade.
First, the sector no longer represents an oversold group with no consensus, as was the case during last year's rally. Several peers have also recently upgraded the sector, indicating a broader consensus.
Second, anticipated risk aversion due to uncertainty is already built into the market, reflected in the strong performance of low-volatility stocks overall.
Finally, the rate market appears to have already priced in this year's monetary easing, with key indicators such as the two-year US Treasury yield and Federal Reserve projections coming in line with expectations.
Wells Fargo is also withdrawing its two-year recommendation on a sector balance between communication services and defensives, which have outperformed over the past two years. Analysts are now encouraging investors to look for opportunities in mid-cap growth, which they believe offers an “attractive risk/reward ratio with reasonable downside protection.”
They note that the S&P 400 Midcap Growth Index is currently positioned for an oversold bounce and is up double digits year-to-date.
In addition, several attractive factors stand out for mid-cap companies, such as stable earnings, a solid liquidity position and a more attractive balance sheet compared to small-caps. In addition, the group's relative price-earnings (P/E) valuation is approximately 90% of the S&P 500.
!function(f,b,e,v,n,t,s){if(f.fbq)return;n=f.fbq=function(){n.callMethod? n.callMethod.apply(n,arguments):n.queue.push(arguments)};if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;n.queue=();t=b.createElement(e);t.async=!0;t.src=v;s=b.getElementsByTagName(e)(0);s.parentNode.insertBefore(t,s)}(window, document,’script’,’https://connect.facebook.net/en_US/fbevents.js’);
