The market hopes the Federal Reserve’s long-awaited pause will be the one that refreshes. It may, instead, be the one that depresses—and healthcare and consumer staples stocks should benefit.
The
S&P 500 index
has already gained about 7% this year, and the overarching driver has been expectations that the Fed is nearing the end of its interest rate hikes. Few will argue that the end is near. The rate of inflation has been falling, economic growth has already started to weaken, and regional-bank stocks continue to signal weakness in the financial system. The idea is that, after a few bumps in the near term, the economy should stabilize and go on its merry way—and the stock market will rise with it.
Perhaps. But there’s another way to read the rally—that it has been spurred by investors front-running the end of the Fed’s tightening who will be motivated to sell stocks once the pause becomes a reality. “Fed Chair Powell on Wednesday will signal the Pause ‘news’ whose ‘rumor’ markets began to anticipate aggressively at the March S&P 500 trough,” writes Evercore ISI strategist Julian Emanuel. “We expect a ‘sell the news’ reaction as soon as that rumor turns out to be true.”
If that’s the case, defensive sectors like healthcare and staples could perform the best. They’ve been largely left out of this year’s rally, which has been led by
Meta Platforms
(ticker: META) and the rest of Big Tech. The
Health Care Select Sector SPDR
exchange-traded fund (XLV) is down 0.6% in 2023, while the
Consumer Staples Select Sector SPDR
ETF (XLP) is up 4.1%.
Emanuel, though, doesn’t recommend just buying the sectors outright. Instead, he screened for healthcare and staples stocks in the
Russell 1000 index
that have underperformed the median stock in their sectors for the year even though their earnings per share are expected to grow faster than their sector’s. The stocks that made the list include
Bristol Myers Squibb
(BMY),
Johnson & Johnson
(JNJ),
Keurig Dr Pepper
(KDP), and
J.M. Smucker
(
SJM
).
Two stand out.
UnitedHealth
Group (UNH) is down just over 6% this year, even though analysts expect it to grow EPS at just over 12% this year to $24.98. That’s in contrast to the 3% gain for the median healthcare stock, and a slight drop expected EPS for the Health Care Select Sector SPDR’s aggregate earnings. To accomplish that growth, analysts see UnitedHealth’s sales increasing just over 12% to about $364 billion this year, as the company signs up millions of new Medicare Advantage members and expands its Optum segment, which provides healthcare and medicine to its customers, among other services.
Conagra Brands
(CAG), which sells food under the Bird’s Eye, Hunt’s, and Swiss Miss brands, among others, also made the list. The stock has fallen 0.7% the year, lagging the Consumer Staples ETF’s 0.2% decline, though analysts expect Conagra’s earnings to grow 8.5% this year to $2.81, more than double the sector’s growth rate, as it raises prices to boost sales growth. Gross margin is also expected to expand this year, to around 27% from 26% last year, as input costs decline.
Growing earnings and a lower price? What’s not to like?
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
Read the full article here
