Forget all the talk of a rebound in the financial and energy sectors, the odds say that defensive stocks are still an investors best bet, said Denise Chisholm, sector strategist at Fidelity. According to Chisholm, the highest probability is that the market continues to see a defensive rotation toward sectors with stable earnings growth like consumer staples, healthcare and utilities and away from more economically sensitive sectors like energy, financials and materials. “One of the key themes in the market has been profitability problems. Only half the time are profit contractions related to recessions, so this does not necessarily forecast a decline in GDP – this is a stock thing, not an economic thing,” said Chisholm. “Earnings growth has been contracting, with more than just the energy and materials sectors driving it.” According to Chisholm, any upturn in earnings growth has been weak and the probability that it can recover off these lows is a “push.” “It is possible, but certainly not a fat pitch, for strong earnings growth in the third quarter,” said Chisholm. Her favorite sector is consumer staples because it continues to show relative earnings growth and improving margins over the last four years. In her view, the sector is “lean and mean.” Year-to-date the consumer staples sector in the S&P 500 has returned 4.3%. The utilities and energy sectors in the S&P 500 are up 15% and 12% respectively, leading the way. On the flip side, the financial sector is down 19% year-to-date, suffering from the low-interest environment. “Financials need loan growth, which is accelerating, but credit is starting to deteriorate in certain spots. It’s not sharp, but it is bad for the odds of the sector outperforming,” said Chisholm.
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