The Zhitong Finance App learned that the US stock market has rebounded at an accelerated pace from the sluggish trend in April. However, the leading forces are not the “Magnificent Seven” (Magnificent Seven) led by Nvidia and Microsoft, but two relatively unpopular sectors that have long been overlooked by global capital — utilities and essential consumer goods — reflecting a clear change in global capital preferences for the stock market. In the European stock market, utility stocks and real estate stocks, which have continued to be sold off since 2022, have driven the Stoxx 600 Index to new highs. Generally speaking, during periods of economic downturn, these sectors, especially the utilities sector, usually perform very well.

The data shows that since April 16, the benchmark stock index for US stocks, the S&P 500 (S&P 500), hit a recent bottom, utility stocks have been rising. The utility sector has risen by nearly 12%, accounting for almost all of the industry's gains so far this year. Among them, power giant Vistra Energy increased by more than 140% during the year. In the same period (since April 16), the consumer staples (consumer staples) sector of US stocks rose nearly 6%. The increase in this category of stocks was second only to utilities, while the S&P 500 index only rose by about 2.7% during the same period.

In the European stock market, utility stocks are also the core driving force behind the recent continuous upward trend of the European stock benchmark stock index, the Stoxx 600 Index. Recently, it has even strongly led the benchmark index to record highs. Capital is currently betting that the ECB's interest-rate cut cycle could significantly boost undervalued utility stocks, real estate stocks, and small-cap stocks, and undervalued cheap stocks can often provide downside protection.

Magnificent Seven and “Ocean's Eleven” popularity subsided, and utilities supported stock index gains

The Magnificent Seven in the US stock market include Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms. Global investors have continued to flock to the seven tech giants since 2023 and the first quarter of 2024. The main reason is that they are betting that technology giants are in the best position to use artificial intelligence technology to expand revenue due to their huge market size and financial strength.

However, since April, due to erratic expectations of the Federal Reserve's interest rate cuts, the performance outlook for superimposed tech giants has generally been sluggish — only 15% of the S&P 500 companies that released their forecasts in April have exceeded expectations, which is the second lowest level since the pandemic. Magnificent 7, which has a high valuation, is trending downward, while utilities and essential consumer stocks are the core driving forces leading the recent rise in US stocks.

Since the second half of 2023, under the strong impetus of the European stock “GRANOLAS” (GRANOLAS), the European stock benchmark index, the Stoxx 600 Index, has continued to reach record highs. Their huge contribution to the European stock benchmark index is comparable to the importance of the “Seven Magnificent Tech Giants” (Seven Magnificent) of the US stock market to the US stock S&P 500 index.

Unlike the US stock Magnificent Seven, which focuses on the technology sector, the European stock “GRANOLAS” (GRANOLAS) favors non-technology stocks. “Ocean Eleven” refers to 11 major European companies, including GlaxoSmithKline, Roche, Asmack, Nestle, Novartis Pharmaceuticals, Novartis Pharmaceuticals, L'Oréal, LVMH, AstraZeneca, SAP, and Sanofi. They all rank among the industry leaders.

However, European stocks have generally fallen into a sideways adjustment or downward phase recently. The main reason is that “Ocean Eleven,” which is already highly valued, cannot continue to rise due to performance not being in line with investors' extremely high expectations. Among them, the two companies with the highest market capitalization in Europe — lithography giant ASML (ASML) and Novo Nordisk (Novo Nordisk), the manufacturer of the “magic drug for weight loss” simeglutide (Novo Nordisk), were hit hard on earnings days. Asmack evaporated about $45 billion in four trading days, while Novo Nordisk experienced its biggest two-day decline in 18 months.

In the past two months, utility stocks and real estate stocks, which have not been popular in the European stock market since the 2022 energy crisis, have continued to outperform the market by a large margin, and have recently driven the European Stock Exchange 600 Index to record highs. Asmer and Nord have even completely lagged behind the market during this time.

Recently, Wall Street strategists have said that after experiencing a sluggish performance in early 2024, undervalued value sectors such as utilities, real estate, and essential consumer goods may catch up at least in the short term.

Considering that these relatively unpopular sectors have been the worst performing stock market sectors in the S&P 500 index since last year, Truist Co-Chief Investment Officer Keith Lerner (Keith Lerner) believes that to some extent, this trend can be described as investors shifting to undervalued sectors that have not participated in the recent sharp market rebound.

Lerner said that from a valuation perspective (measured using forward price-earnings ratio indicators), the overall discount margin of the US utility sector's March valuation compared to the S&P 500 index was the biggest difference since 2009. Meanwhile, the overall performance of the essential consumer goods sector over the past year has outperformed the S&P 500 index by nearly 30%. Valuation factors can be said to provide potential buying opportunities for these two traditional “defensive” investment sectors.

In the European stock market, the average valuation of utility stocks over the past 10 years is comparable to the overall market valuation. According to LSEG DataStream's estimated data based on PE metrics, their prices are now equivalent to a 10% discount. Real estate currently has a premium of 12%, or less than half of the average premium of 30%. Combined, as uncertainty about the trend of the US benchmark interest rate affects the market, such low valuations and transaction prices may make them less affected by possible drastic pullbacks. Furthermore, these industries are highly shorted, which means that once the market turns, they may face shortfall compensation.

In an interview with the Italian media, Lerner said, “As the market has risen so much since October last year, people are getting nervous.” “They want to move to something more defensive and make some profitable settlements on overvalued tech stocks... Investors are just saying: if the market adjusts, what are the chances to catch up or better maintain their advantage?”

“Market positions are rarely this extreme. I'm sure there will be a rotation. It may be violent and will inevitably reward these stocks that were once lagging behind,” said Alberto Tocchio (Alberto Tocchio), head of European stocks and themes at SGR at Kairos Partners. “Commodities, utilities stocks, and small-cap stocks are the three key areas where I will start increasing my holdings. We're already starting to do that in all of our funds.”

Behind the sharp rise in utility stocks: factors such as valuation and fundamentals resonate

Why have utility companies been so sought after in the US and European stock markets in the past month? In addition to the absolute investment advantages brought about by the above undervaluation, there are also obvious fundamental drivers driven by global economic recovery. In particular, economic data shows that the Eurozone economy has regained its growth curve. Compared to the same period last year, the industry's overall profit for the quarter is likely to increase by 26.7%, which is the second-highest profit growth rate forecast of any industry, according to FactSet statistics.

In addition to the recovery in performance fundamentals driven by a low base last year, there is growing interest in artificial intelligence technology and electric vehicle projects, which may significantly increase the level of demand from utility companies, especially power providers. In US stocks, the stock price of electricity giant Vistra Energy (VST.US) has repeatedly reached new highs, rising by an astonishing 142% during the year. Wall Street bank Goldman Sachs predicts that the compound annual growth rate of data center power demand is expected to reach 15% from 2023 to 2030, and that by 2030, the share of data centers in the total electricity demand in the US will rise from only 3% to 8%.

In addition, there are macroeconomic factors that also play a role in boosting to a certain extent. At a time when utility stocks are rising, investors have digested the message sent by the Federal Reserve last week that it is unlikely to raise interest rates again, and reprice expectations that the Fed will cut interest rates by 50 basis points during the year after the release of weak non-farm payrolls data. In Europe, the possibility that the ECB will cut interest rates in June is increasing.

Utility stocks are very sensitive to US bond yields. As expectations of interest rate cuts from the Federal Reserve return to sight, 10-year US Treasury yields have recently fallen by about 20 basis points from their 2024 high, providing a clear breathing opportunity for an industry that has usually declined as yields rise in the past year.

Another key change comes from the fact that periods of weak economic data can often drive undervalued cheap stocks such as utilities to rise. After economic growth continued to surprise Wall Street at the beginning of the year, economic data changed in April, highlighted by weaker-than-expected US non-farm payrolls reports and a contraction in manufacturing activity during the month.

There are doubts about whether utility stocks can maintain strong gains in the long term

While these economic data don't mean the US economy is definitely slowing down, it did get investors' attention. Morgan Stanley's chief investment officer Mike Wilson, who has always been bearish on US stocks, wrote in his weekly report to clients on May 5: “If manufacturing data continues to weaken, investors may want to consider holding a small amount of exposure in defensive stocks such as utilities and essential consumer goods.”

However, according to some Wall Street analysts, the strong upward trend in utility and essential consumer goods stocks in the stock market will not necessarily continue from a long-term investment perspective.

Kevin Gordon (Kevin Gordon), a senior investment strategist from Charles Schwab (Charles Schwab), said he is “unsure” whether this defensive investment strategy will last. “Because when investors look at the core factors that have led the rise in the stock market since the beginning of March, they will find that there are many different factors at play.”

Gordon said, “The strong rise in the communications services industry dominated by tech giants over the past few months shows that the market favors technological momentum, and cyclical energy stocks have also performed well. Meanwhile, the recent rise in utility stocks indicates a full return to defensive strategies.”

“Surprisingly, these three sectors, which reflect different strategies and preferences, are currently the best performers in the S&P 500 index this year. This overly complicated information doesn't give me a clear signal that the market is embracing risk or choosing to take risks.” Senior investment strategist Gordon emphasized.