Investors wondering which stocks to invest in now should focus on three particular US equities sectors in the second half of the year, the specialist investment arm of a leading US bank said in a new report.
The Wells Fargo Investment Institute – part of US bank Wells Fargo (WFC) – provides investment advice and insights for financial professionals covering equities, fixed income, real estate and alternative investments.
Over the past six months, US equities tracked by the S&P 500 (US500) are down 17%.
S&P 500 (US500) index
Three sectors to watch
Energy, healthcare and information technology (IT) were named as the three equities sectors that the Wells Fargo Investment Institute favours.
“We favour increased emphasis on quality over cyclicals in our sector positioning and selectivity at the sub-industry level,” Wells Fargo Investment Management’s Chief Investment Officer Darrell Cronk said in the report.
“We view quality and selectivity as necessary to at least partially offset near-term headwinds while also remaining in position to potentially benefit from positive structural forces that we believe will present opportunities in the coming years.”
Wells Fargo favours the energy sector for “the uptrend in oil prices and secular supply constraints that we expect to persist for some time to come” and prefers integrated oil and gas companies which have “strong capital bases and a positive relationship with commodity price levels”.
Although the Wells Fargo report didn’t specify or recommend individual stocks, two examples of energy stocks are Chevron (CVX), a successor company of the 20th century’s Standard Oil, and Devon Energy (DVN), an oil and gas exploration, development, and transportation company based in the state of Oklahoma.
Chevron (CVX) stock price
Wells Fargo prefers the healthcare sector due to its mix of defensive and quality characteristics.
“We favour the managed care sub-industry of the healthcare sector due to the diminishing risks from both the pandemic and politics along with this group’s exposure to steady longer-term growth drivers (such as demographics and industry consolidation),” Wells Fargo said.
A major US managed care provider is Centene (CNC) which provides services to government-sponsored and commercial healthcare programmes.
Centene (CNC) stock price
Finally, Wells Fargo’s Investment Institute favours the IT sector for its “high-quality attributes and the prospects for technology’s continued long-term integration into the economy”.
Within the sector, it highlighted the sub-sectors of IT services, networking equipment and enterprise software as it expects “relatively resilient tech spending in the economy and continued high-quality financial metrics” in these sub-sectors.
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One US-headquartered network equipment maker is Palo Alto Networks (PANW), which makes firewalls and also offers cybersecurity-related products and services covering internal networks and the cloud.
Palo Alto Networks (PANW) stock price
Earnings under pressure
Looking ahead to the rest of the year, the Wells Fargo Investment Institute is forecasting a slowdown in earnings growth.
“In the US, we expect 2022 revenue growth to be challenged as the economy slows. Also, we see operating margins falling from record levels while interest, labour, and input expenses climb,” Wells Fargo said in the report.
“We forecast positive but slowing earnings growth in 2022 and an earnings contraction in 2023 due to the recession we expect in late-2022 and early-2023.”
The US bank’s Investment Institute is also forecasting higher interest rates and slower growth likely will continue to place some downward pressure on near-term price/earnings multiples.
“However, later in 2023 we expect the beginning of an economic recovery that markets may project into 2024. In that case, valuations should stabilize and rise, taking equity prices higher through the end of 2023.”
Traders and investors will get an update on corporate earnings for the second quarter on Thursday.
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Source: capital.com
