Recession-proof stocks are leading the market’s latest leg higher

Stocks have rebounded from a rough April, led by two sectors that typically outperform when the economy is in a downturn.

Since April 16, around when the S&P 500 (^GSPC) hit its recent bottom, Utilities (XLU) have led the charge, rising nearly 12%, accounting for all of the sector’s gains year-to-date. Consumer Staples (XLP) stocks have risen almost 5% in that same period, while the S&P 500 is up about 2.7%.

Wall Street strategists said the two sectors are likely catching up after a dismal performance to start 2024.

Considering both sectors had been among the worst performers in the S&P 500 over the last year, Truist co-CIO Keith Lerner reasoned there’s an aspect of the move that is merely investors rotating into an area that has yet to participate much in the recent market rally.

The Utilities sector entered March trading at its largest discount to the S&P 500 from a valuation standpoint (using a forward price-to-earnings ratio) since 2009, per Lerner. Meanwhile, Consumer Staples had underperformed the S&P 500 by almost 30% over the last year. This presented a potential buying opportunity in both traditionally “defensive” sectors.

“With markets up so much as we’re up since October, people get nervous,” Lerner told Yahoo Finance. “They want to rotate into something a little more defensive, take some profit taking … It’s also just saying, ‘Hey, what hasn’t worked and what could have an opportunity to do some catching up or hold up better should the market correct?'”

There have been clear fundamental drivers of why Utilities would catch a bid over the past month. Earnings for the sector are up 26.7% this quarter compared to the same period last year. That’s the second-highest growth rate of any sector, per FactSet. And there’s growing conversation around how increased interest in projects involving artificial intelligence and electric vehicles could boost electricity demand for companies within the Utilities sector.

There have also been several macro catalysts at play. The move higher in Utilities, an interest rate-sensitive sector, has come as investors have…

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