Us Investment Trends: Where's The Money?

The US stock market is divided into 11 sectors, which group stocks with similar business characteristics together. These sectors are defined by the Global Industry Classification Standard (GICS), which was developed by MSCI and Standard & Poor's.

The 11 sectors of the US stock market, along with some of the top companies in each sector, are:

1. Energy: Chevron, ExxonMobil, Halliburton

2. Materials: Dow, DuPont, Sherwin-Williams

3. Industrials: 3M, Caterpillar, Delta Air Lines

4. Consumer Discretionary: Amazon, Ford Motor Company, Home Depot

5. Consumer Staples: Coca-Cola, Procter & Gamble, Walmart

6. Health Care: Pfizer, Johnson & Johnson, UnitedHealth

7. Financials: Bank of America, Berkshire Hathaway, JPMorgan Chase

8. Information Technology: Apple, Microsoft, Nvidia

9. Communication Services: Disney, Meta Platforms, Verizon

10. Utilities: Dominion Energy, Duke Energy, NextEra Energy

11. Real Estate: American Tower, Public Storage, Simon Property Group

Each sector exhibits different investment characteristics and is influenced by various economic and market forces. For example, the consumer discretionary sector is sensitive to economic cycles, while the healthcare sector can be more dynamic and exhibit above-trend growth.

Energy

The energy sector covers companies involved in the production, supply, and services of energy products, including oil and gas exploration, renewable energy technologies, and equipment providers.

In 2023, global energy investment reached a record USD 2.8 trillion, with over USD 1.7 trillion directed towards clean energy sources and just over USD 1 trillion towards fossil fuels. This shift towards clean energy is driven by economic recovery, the energy crisis, and policy support.

In the US, President Biden's Investing in America agenda includes the largest investment in reducing carbon emissions in the country's history. This agenda involves incentives for clean energy manufacturing, investments in demonstration projects, loans and loan guarantees, and production and investment tax credits for clean energy generation.

As a result, private companies have announced over half a trillion dollars in new investments in clean energy, electric vehicles (EVs), and batteries. This includes a notable focus on solar and wind energy, with over 100 gigawatts of planned manufacturing capacity for solar module assembly, and a projected 338 gigawatts of solar capacity by 2030.

The energy sector is crucial for the global economy, and investments in this sector offer potential for high dividends and company growth. However, it is also volatile and subject to environmental and regulatory concerns.

Some of the largest energy companies by market capitalization include Exxon Mobil Corp, Chevron, PetroChina Co Ltd, and TotalEnergies SE. These companies are actively investing in future low-carbon energy projects, renewable energy sources, and responding to the shift towards decarbonization.

Materials

The materials sector includes companies that provide various goods for use in manufacturing and other applications. This sector is closely tied to the economic cycle, rising and falling with the overall state of economic growth. It includes chemical producers, metals and minerals producers, makers of construction materials, and producers of wood-based goods.

However, materials stocks may lose value during economic downturns. When the economy enters a recession, material prices tend to fall, hurting the stock performance of these companies.

Some well-known materials stocks include Sherwin-Williams, a paint manufacturer, and chemicals producers such as DuPont de Nemours, LyondellBasell Industries, and Air Products & Chemicals.

Industrials

The industrials sector is broad and diverse, encompassing various subsectors and industries. These include aerospace and defence, air freight and logistics, construction and building supplies, industrial machinery and electrical equipment, and automotive and railway transportation.

Some of the largest industrials stocks in the US include:

• United Parcel Service Inc. (UPS)
• Raytheon Technologies (RTX)
• Caterpillar Inc. (CAT)
• General Electric (GE)
• Union Pacific Corp. (UNP)
• Honeywell International Inc. (HON)
• Deere & Company (DE)

Investing in industrial stocks offers several advantages, such as strong returns during economic booms and the inclusion of well-established, large, and diversified companies. However, it is important to note that industrial stocks are cyclical, and their performance is closely tied to economic conditions. When the economy weakens, orders for industrial firms decline, leading to underperformance.

When considering investing in individual industrial stocks, it is crucial to research and assess the risks associated with each company. Diversification is essential to mitigate risks, and exchange-traded funds (ETFs) or index funds can be a more stable option for investors.

Healthcare

The healthcare sector is an attractive area for investors, particularly private equity funds. The sector is made up of many different industries, including pharmaceuticals, devices, health insurers, and hospitals. Each of these industries has its own unique dynamics and challenges.

The healthcare sector is influenced by several trends, including an aging population, people living longer with chronic diseases, and technological advancements. These factors contribute to a stable market as the aging population consumes more healthcare products and services.

Pharmaceutical companies benefit from stable or rising demand for healthcare products. Additionally, new markets, such as advanced therapies and biologic products, offer opportunities for growth. However, they also face challenges like weak pipelines and expiring patents, which may lead to inorganic growth strategies.

Medical device companies, specifically in the European market, face uncertainties due to changing regulatory environments. They also experience pricing pressures from health insurance and tightening government budgets, requiring them to adapt to high compliance standards.

Health insurers are the companies that pay medical bills in exchange for premiums. Their profitability is driven by underwriting skills, and investors should monitor key ratios like the medical cost ratio and the medical loss ratio.

Investing in healthcare stocks can be profitable but requires a multifaceted approach to understanding the capital requirements and drivers. It is important to consider the underlying trends, such as the impact of an aging population and the potential for a single-payer system.

To reduce the volatility associated with investing in individual healthcare stocks, investors can consider investment vehicles like ETFs and healthcare mutual funds, which provide diversification across different industries within the sector.

Financials

The financial sector is a section of the economy made up of firms and institutions that provide financial services to commercial and retail customers. This sector includes banks, investment companies, insurance companies, and real estate firms. It is one of the largest portions of the S&P 500, with some of the most recognisable banking institutions in the world, such as JPMorgan Chase and Bank of America, falling into this category.

The financial sector is one of the most important parts of many developed economies. It is made up of brokers, financial institutions, and money markets—all of which provide the services needed to help keep the economy functioning. A strong financial sector is a sign of a healthy economy.

The financial sector generates a large portion of its revenue from loans and mortgages and thrives in a low-interest-rate environment. When interest rates are low, the economic conditions open the doors for more capital projects and investment, which benefits the financial sector.

The financial sector can be broken down into several categories, including banks, insurance, financial services, mortgage REITs, and fintech.

Banks

Bank stocks make up the bulk of the financial sector. These include commercial banks, such as Wells Fargo, which provide deposit accounts and loans to individuals and businesses. They also include investment banks, such as Goldman Sachs, which provide services to institutions and high-net-worth investors. Some banks, like JPMorgan Chase, serve both commercial and institutional clients.

Insurance

The insurance subsector is the second-largest part of the financial sector and includes property and casualty insurers, life and health insurers, specialty insurers, and insurance brokers. Berkshire Hathaway is the largest company in the insurance subsector. This subsector also includes "insurtech" companies, such as Lemonade.

Financial Services

Some companies provide services related to investing and the public markets without being classified as banks or insurers. The ratings agency S&P Global and the futures exchange CME Group are two examples of financial service providers.

Mortgage REITs

Mortgage REITs are companies that own mortgages and other financial real estate instruments, known as mortgage real estate investment trusts (mREITs).

Fintech

Fintech companies, or financial technology companies, are those that leverage technology to create new solutions for the financial industry. Visa, PayPal Holdings, and Block (formerly known as Square) fit into this category.

SPACs

A special purpose acquisition company, or SPAC, is a company with no business operations that exists to take another company public. Also known as "blank check" companies, SPACs are considered part of the financial sector.

Analysing Financial Sector Investments

When evaluating financial sector investments, investors can use both standard metrics, such as the price-to-earnings (P/E) ratio, and custom, sector-specific metrics. For the banking and insurance subsectors, there are some particularly important metrics for investors to consider, including return on equity (ROE), return on assets (ROA), net interest margin (NIM), efficiency ratio, net charge-off (NCO) ratio, and price-to-book (P/B) ratio.

Positive and Negative Factors Affecting the Financial Sector

Some of the positive factors that affect the financial sector include moderately rising interest rates, reducing regulation, and lower consumer debt levels. Conversely, investors should also be aware of some negative factors, such as rapid interest rate increases, yield curve flattening, and more legislation.

Frequently asked questions