This year’s first half put the nail in the coffin of 2022′s global bear market. The new bull market’s rise has been led by the same categories that were hit hardest in the downturn. Doubters from Halifax to Helsinki can’t see it, but that beautiful bounce isn’t done. So where to turn now? Here are three key sectors likely to lead this young bull market higher – and three likely to underperform.
Before scouring sectors, remember: Where you are in a market cycle is more crucial than sector or stock picking. Think broad market conditions first, then get granular. Over all, in bull markets, most stocks rise, while in a bear market most fall. Yet too few consider this basic truth. We are in a young global bull market now, so this is a great time to own stocks.
Tech and other big growth stocks have underpinned the upswing so far (which explains why the tech-light S&P/TSX Composite has seen a more modest bounce-back). That shouldn’t be surprising, given categories that fall most in bear markets routinely rebound the strongest in recoveries. After 2022′s pummelling, global tech equities soared a whopping 41.9 per cent (in Canadian-dollar terms) off last June’s bottom through this Aug. 14. That dwarfs world stocks’ still-impressive 26.6-per-cent rise. Meanwhile, fearful headlines keep dismissing tech’s rise as an AI-hype-fuelled run that is set to fizzle. Such misperceptions are actually bullish, as they are providing more firepower by keeping expectations low for the sector’s performance.
Other bear market laggards have led the new bull market, too – including tech-like segments of the communication services and consumer discretionary sectors, and industrials, which was pounded by 2022′s interminable global recession fretting. Today’s fundamentals – particularly torpid global growth – favour growth-oriented sectors.
As I detailed on July 20, in weak expansions investors bid up true growth firms – those that are not reliant on frenetic activity to increase earnings. (Those companies are rare, which make them even more valuable.) That means high-quality tech, whose fat 47-per-cent gross operating profit margins fuel reinvestment – and future growth. Software and semi-conductor firms should thrive. Investors should shop in America, the global hub for the sector. Consider Germany, Taiwan, South Korea and the Netherlands to diversify. Some AI-adjacent tech is fine if it fuels growth – but avoid AI pure plays. Predicting far-flung long-term winners is impossible this early on.
The consumer discretionary and communication services sectors should feel a growth turbocharge, too. In the former sector, look to luxury goods and its 57-per-cent average gross profit margins to underpin gains. I detailed these sparkling stocks’ allure on June 21. You won’t find many at home, so shop in Europe – France, Switzerland and Italy are hotbeds – plus a bit in America. Also target firms in the broadline retail industry, primarily online chains with diverse product categories, and which deal in higher-volume, lower-priced goods. The biggies are U.S.-based.
In communication services, stodgy old telecom is likely to underperform. Instead, favour big, tech-tied interactive media and services industry firms, which hold huge growth opportunities. They averaged 14-per-cent revenue growth in 2022 despite overall global weakness, and booked gross profit margins of 62 per cent. The TSX has no players in this sector; America dominates the industry.
The main laggards? Defensive categories such as health care, consumer staples and utilities face headwinds in young bull markets. These typically fare better in bear markets – folks still need to buy medicine, bread and power during downturns – as investors believe they have stability. But with 2022′s bear market long gone, that perceived stability loses appeal; it becomes lost opportunity.
So where does that leave the TSX’s big financial and energy firms? Financials should be middle of the pack. Rate hikes that stoked interest-rate spreads – and lending profits – are slowing, a key headwind. Don’t avoid them, but don’t load up, either.
Energy will likely be an underperformer. Investors bid oil and gas stocks too high last year, in expectation of the kind of short-term price pinches seen in 1970s-style shortages. Those pinches never struck. Now ample supply caps prices – and profits. The U.S. Energy Information Administration projects world liquid fuels production increasing 1.4 million barrels a day this year and another 1.7 million b/d in 2024. Canadian crude production, up 2.6 per cent last year, is edging higher, too. Hence, despite fears of OPEC and Russian squeezes, oil is down 35.3 per cent from the high of March, 2022. The threat of European natural gas spikes appears to be diminishing as supply remains abundant and storage is filling fast.
That said, own some of these expected laggards. Why? Because I could be wrong. Buying a bit from sectors you expect to lag guards against big, perverse portfolio swings. Own some, but less than world stock indexes hold.
There will be a time before long to rotate from high-quality growth stocks to a more value-driven portfolio. But that hinges on a global economic reacceleration that isn’t quite here yet. So be bullish – and own growth.
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