S&P 500, a leading index of the US stock market is a broad representation of the US economy’s 11 different sectors. Stocks representing all of these eleven sectors may not be the favorite of investors at all times. Depending on various factors, both internal and external to the company, some sectors may outshine others over a period of time. Investors bullish on specific sectors may shift to another one as the factors impacting those industries change. This in stock market parlance is called Sector Rotation. Simply put, a sector rotation strategy is an investing strategy that involves shifting funds among different sectors of the stock market in order to take advantage of changing economic conditions.
For example, when the economy is expanding, investors may rotate funds into cyclical sectors such as consumer discretionary stocks, and away from defensive sectors such as utilities and consumer staples. Conversely, when the economy is in a recession, investors may rotate funds into defensive sectors and away from cyclical sectors. Sector rotation strategies can also be used to exploit changes in sector valuations.
This is that time of the year when analysts and strategists churn the numbers and put buy, sell or hold ratings on sectors and stocks. So, with the end of the year approaching, where are analysts most optimistic and pessimistic in terms of their ratings on stocks in the S&P 500 for 2023?
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According to John Butters, Vice President and Senior Earnings Analyst at FactSet, overall, there are 10,835 ratings on stocks in the S&P 500. Of these 10,835 ratings, 55.3% are Buy ratings, 38.8% are Hold ratings, and 5.9% are Sell ratings.
At the sector level, analysts are most optimistic on the Energy (63%), Communication Services (61%), and Information Technology (61%) sectors, as these three sectors have the highest percentages of Buy ratings. On the other hand, analysts are most pessimistic on the Consumer Staples (43%) sector, as this sector has the lowest percentage of Buy ratings. This sector also has the highest percentage of Hold ratings (46%) and Sell ratings (11%).
How accurate were the sector-level Buy ratings one year ago (December 31, 2021) in terms of predicting price performance almost one year later? Overall, the price of the S&P 500 has decreased by 16% since December 31, 2021 (to 3995.32 from 4766.18). The Energy sector had the highest percentage of Buy ratings at the end of last year and has also recorded the largest price increase (+54%) of all eleven sectors since the end of last year.
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However, the two sectors with the next highest percentages of Buy ratings (Information Technology and Communication Services) at the end of last year have seen the largest price decline and fourth-largest price decline of all eleven sectors during this time.
It is interesting to note that the same three sectors that had the highest percentages of Buy ratings at the end of last year also have the highest percentages of Buy ratings at the end of this year.
On the other hand, the two sectors with the smallest percentages of Buy ratings (Consumer Staples and Utilities) at the end of last year have been the second-best and fourth-best performers in terms of price returns of all eleven sectors during this time.