Is a Reversal Coming? The Most Underperforming Sector in the US Stock Market This Year is Severely Oversold
At least from a hedging perspective, the probability of buying utilities and selling technology sectors is increasing, along with the potential returns.
For investors holding utility sector stocks, this year has not been a good one - the utility sector has been the worst-performing sector in the US stock market so far in 2023 - but this situation may be coming to an end.
Utility Sector Soars in September
According to FactSet data, the utility sector has risen more than 3% so far in September, making it the second-best performing sector in the S&P 500 index, just behind the energy sector.
According to Dow Jones Market Data, the utility sector has also outperformed the information technology sector, which has fallen 4.3% this month, marking its largest decline since December 2022.
David Wagner, portfolio manager at Aptus Capital Advisors, said, "The utility sector is currently severely oversold." "Given the nature of this oversold condition, people should always be alert to some kind of sudden reversal."
At least from a hedge perspective, the odds and potential returns of buying utilities and selling technology stocks are increasing.
Are Utility Stocks Cheap?
Unlike fast-growing tech stocks, utility stocks are typically seen as dividend income investments or defensive holdings, especially during economic downturns or recessions.
The utility sector is expected to pay a dividend yield of 3.3% this year, more than double the 1.6% dividend yield of the S&P 500 index, but significantly lower than the 5.03% yield of the two-year Treasury note.
Wagner said, "When interest rates rise, utility stocks often underperform, and this is a normal phenomenon, and utilities are clearly defensive and interest rate-sensitive industries."
Irene Tunkel, Chief US Equity Strategist at BCA Research, said that compared to technology companies, the utility industry is "already cheap."
The expected price-to-earnings ratio for the S&P 500 utility sector is 17.4, while the expected P/E ratio for the S&P 500 index is 19.4, and the expected P/E ratio for the S&P 500 information technology sector is 27.8.
