March 3, 2025 (Maple Hill Syndicate) - In the first two months of this year, technology stocks fell more than 4% and consumer discretionary stocks fell about 5%. They were the only two sectors with losses among the 11 market sectors tracked by Standard & Poor's Dow Jones Indices.
Is that the way this year is going to go? I don't think so. Here's my take on each sector.
Technology
One year ago I wrote, I'd pencil the tech group in for a 15% gain over the coming 12 months. That was pretty close. The actual figure was 18.4%.
For the coming 12 months, I predict that technology stocks will score single-digit gains, and so will the overall market. Let's face it: Stock prices are on the high side.
Need examples? Microsoft Corp. (NASDAQ:MSFT) sells for 32 times earnings, Apple Inc. (NASDAQ:AAPL) for a 38 multiple, and Nvidia Corp. (NASDAQ:NVDA) for a price/earnings ratio of 42. As the Wall Street adage says, trees don't grow to the sky.
Utilities
Very few people would guess what the best performing sector of the past 12 months was. It was utility sector, up 31.7%. Investors got excited about utilities on the premise that data centers will suck up vast amounts of electricity, spurring demand.
That enthusiasm has started to deflate, and I think utilities will have meager gains in the next 12 months.
Next best in the past 12 months was the financial sector, with a 31.5% gain through February. I think it continue to do well. One reason: Long-term rates are back above short-term rates, as they should be. Also, loan demand might pick up, and insurance regulators have been allowing big premium increases.
Communications
The S&P's communications services sector is dominated by Alphabet Inc. (NASDAQ:GOOGL), Meta Platforms Inc. (NASDAQ:META), Comcast Corp (NASDAQ:CMCSA). (CMSCA), and Verizon Communications Inc. (NYSE:VZ). This was the third-best performer in the past 12 months, up 29.2%.
I'm guessing the sector will do pretty well in the year ahead. Comcast and Verizon look cheap at 9 and 10 times earnings respectively.
Consumer Staples
In the staples sector you see the likes of Walmart Inc. (NYSE:WMT), PepsiCo Inc. (NASDAQ:PEP) and Procter & Gamble Co. (NYSE:PG). This group had a good move in the past 12 months, up 19.3%. I expect smaller gains in the coming 12 months. I feel that investors are overpaying for these stocks' presumptive stability.
The real estate segment did respectably in the past 12 months (up 14.3%), but my friends who are in that business tell me that vacancy rates are still high and that buildings are still too expensive. I suggest going light or bare here.
Energy
Lagging the market in the past 12 months, the energy sector gained 9.2%, exactly half the gain for the S&P 500 as a whole. But advanced economies need lots of energy, even if electric cars gradually replace gasoline-powered ones. I reckon this sector is due for a comeback.
The two largest stocks in the sector are Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX). Exxon offers a 3.5% dividend yield, Chevron 4.1%. I like them both.
Materials
The weakest sector in the past 12 months was Materials (up 3.2%). This sector includes chemicals, steel and other metals, construction materials and packaging. I think it will do better in the next 12 months, but still only match the market.
The second-worst sector over the past 12 months was health care, up a puny 4.6%. I think it will look a lot more attractive in the coming 12 months. The stock market often turns south after two big up years (such as 2023 and 2024). In weak markets, health care often shines.
Two of my favorite stocks in the S&P's health care index are Merck (NSE:PROR) & Co. (NYSE:MRK) and Pfizer Inc. (NYSE:PFE). Outside the index, I like Novo Nordisk (CSE:NOVOb) AS (NVO), based in Denmark, and Chemed Corp. (NYSE:CHE), the largest U.S. provider of hospice services.
Industrials
The industrial sector is often my favorite, as you don't pay a glamor premium for these stocks. The largest components in the sector index are GE Aerospace (GE), RTX Corp. (NYSE:RTX) and Caterpillar Inc. (NYSE:CAT). I expect high single-digit or low double-digit gains here.
Consumer Discretionary
As noted, the consumer discretionary sector was down in the first two months of this year. It almost exactly matched the overall market in the past 12 months, with a 17.4% gain. Consumer spending this year has been weak, but that could have been because of freakish weather.
Amazon.com Inc. (NASDAQ:AMZN) and Tesla Inc. (NASDAQ:TSLA) dominate the sector index, followed by Home Depot Inc. (NYSE:HD) and McDonald's Corp. (NYSE:MCD). Each is a fine company; none is cheap. I figure the sector to be a market performer in the next 12 months.
Disclosure: I own Alphabet, Apple, Chemed, Merck, Novo Nordisk and Pfizer personally and for clients. I own Chevron, Exxon Mobil, PepsiCo and RTX for one or more clients. Katharine Davidge, my wife and a portfolio manager at my firm, owns Microsoft and Nvidia personally and for clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.