The third quarter continued with solid gains for stocks and, with the Fed’s recent help, now bonds have joined the party. These gains have extended across the globe in a variety of different asset classes as well. Stocks have broadened out with small and mid cap stocks gaining investor attention for the first time in years.
This is a healthy sign as the U.S. economy tries to navigate a soft landing and not reignite inflation. When you combine escalating geo-political tensions with markedly higher valuations investors need to be disciplined and focus on areas that still have favorable risk-to-reward.
One of the areas we have been accumulating this year is the utility sector which will benefit from the growing demand needed for AI. Investors are just starting to recognize this sectors potential, as seen in the chart below, both utilities and tech have been among the best sectors the past 12 months. This is interesting in that they are typically considered opposite sides of the risk/growth spectrum with very little correlation.
Similar to utilities being undervalued and an opportunity the past year, currently the energy sector is attractively valued with a very favorable long term risk-to-reward. Energy has both low valuation and low expectations just like utilities had one year ago. In fact, every sector has gained between 20-50% over the past 12 months, with the lone exceptions of energy which is up less than 1%.
