AI-driven companies and sectors have dominated the equity market performance in 2024. The Information Technology (IT) and Communication Services sectors have seen significant growth, with the Bloomberg Magnificent 7 Index rising by more than 30%, contributing to 71% of the S&P 500 Index’s year-to-date return. On the other hand, other sectors have underperformed compared to the broader market.
Analysts at Wells Fargo attribute this tech-driven rally to optimism surrounding AI’s future potential, as well as strong earnings growth. The Communication Services and Information Technology sectors have reported impressive year-over-year earnings growth of 44% and 25% in the first quarter, respectively. The Bloomberg Magnificent 7 Index earnings have surged by 60% during the same period.
Looking ahead, Bloomberg consensus data suggests a broader profitability trend starting in the fourth quarter. Wells Fargo’s favored sectors – Energy, Health Care, Industrials, and Materials – are expected to outpace the S&P 500 Index in terms of earnings growth later this year and into 2025.
Despite the strong performance of the IT and Communication Services sectors so far this year, Wells Fargo strategists recommend rebalancing portfolios by trimming gains and bringing weightings back to neutral. They suggest taking advantage of recent weaknesses in their favored sectors, where they see improving earnings growth and attractive risk-reward profiles.
While upcoming events like the November elections and potential delays in disinflation may lead to market volatility, Wells Fargo believes that any pullbacks could present opportunities to diversify sector exposure within U.S. large-cap equities. They emphasize that U.S. Large Caps remain their preferred equity asset class, but market dips could allow for broader exposure to other equity asset classes.