Which Sectors Have the Best Prospects for 2024, and Which Have the Worst?

History shows that, in up markets, the three leaders for January and February go on to romp big-time, says savant Stovall. The three laggards, on the other hand …

Seasonality-oriented market forecasts are always fun, and they sometimes even come true. The latest one has a momentum logic: In an up-trending market, the three top-performing S&P 500 sectors go on to big gains for the rest of the year—and the bottom three continue to disappoint, according to Sam Stovall, chief investment strategist at CFRA Research.

In 2024, that means communication services, information technology and financials, as the best performers, are on their way to good things for the remaining 10 months. Meanwhile, the tail-end trio that will keep on with their losing ways are materials, utilities and real estate.

Note that the index had to be positive for January and February for this three-and-three pattern to hold true. Through February 29, the S&P 500 had jumped 7%. Stovall also found that two positive first months were most often followed by a good year for the entire S&P 500.

Since 1990, Stovall wrote in a research report, the top trio in the first two months “went on to post a rest-of-year average price gain of 14.8%, versus the S&P 500’s 12.9% return, and outperformed the broad benchmark 62% of the time.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

But “the bottom three sectors continued to underperform during the remaining 10 months of the year, rising an average 10.0% and beating the market just 23% of the time,” Stovall observed. To be sure, 10.0% is not a shabby return—this is all in a bull market, after all—but it’s just not as good a showing as the top three enjoy.

This year, at the apex of the S&P 500’s 11 sectors, communications services (Alphabet, Netflix, Meta Platforms) have a tech shine about them and are ahead 9.6%. Ditto for info tech (Apple, Microsoft, Nvidia), rising 12.5%. Financials (Morgan Stanley, Goldman Sachs, J.P. Morgan), up 7%, are benefiting from strong stock trading and an expected easing of interest rates.

For the stragglers, materials (companies such as chemicals, steel and paper) are ahead just 3.2% this year, with higher interest rates a headwind; while rates should dip somewhat, they still will be lofty by recent standards, and these capital-intensive businesses will need to borrow in the future. The same is true for utilities, at negative 1.6%. Real estate, at minus 0.3%, is dogged by such losers as offices and warehouses.

This pattern pertained in 2023, when the S&P 500 climbed 26.8% for the year. To Stovall, “even though past performance is no guarantee of future results, the market’s opening optimism offers encouragement that in 2024, a good year will likely once again follow a great year.”