The year ahead for the major sectors

Perspectives outlining some of the key themes we think will drive the major industry sectors in 2024.
Neuberger Berman

Neuberger Berman

Each January, we ask our team of research analysts for their outlooks on the major industry sectors for the year ahead.

With the U.S. election coinciding with a likely economic slowdown and the potential for the first rate cuts since 2020, this looks set to be another eventful year. With that in mind, we have presented the key themes across Healthcare, Energy, Technology, Consumer and much more.  .

Macroeconomic and political risk is set to be elevated in the year ahead, so it is no surprise that we expect differing exposures to those risks to be a key determinant of our outlooks on individual stocks’ earnings and performance.

Healthcare services: Election politics and rates

Ari Singh, our Healthcare Services analyst, thinks that the theme of the dominance of top-down forces is likely to continue from 2023 into 2024. Whereas last year was all about the impact of higher interest rates, however, this year will be about interest rates and U.S. election and policy expectations.

While the threat of major negative legislation is largely off the table, there are stark differences in the policy proposals of the two main candidates for the presidency and right now the outcome is too close to call.

The major difference is the likelihood of a Trump administration expanding Medicare Advantage reimbursements, which we think would benefit the healthcare services sector overall, but particularly those stocks geared to Medicare Advantage. As a domestically focused sector, Healthcare Services could also be a shelter from the trade policies of a Trump administration.

Certain stocks in the sector could benefit from Democratic policies on Medicaid, public insurance exchanges and expanding mental-health coverage, but they are fewer in number.

Therapeutics, life sciences & tools and MedTech: Mean reversion?

Apart from a couple of outstanding names, Therapeutics and Life Sciences & Tools underperformed during 2023. Might 2024 bring mean reversion?

Life Sciences & Tools, along with MedTech, are largely insulated from election risk, in our view. However, our analyst Terri Towers notes that it could be a key determinant for large-cap Therapeutics. Over time, changes planned under the Inflation Reduction Act (IRA) could pose a particular risk to manufacturers of Medicare “Part D” drugs, for example. Therapeutics generally underperforms amid the uncertainty of election years—so current outperformance may fade—but a Republican sweep in November could trigger a significant relief rally.

Beyond election risk, we have assessed various new Therapeutic categories. We think some, such as gene therapy/gene editing and antibody drug conjugates (ADCs) across the oncology landscape, could eventually be attractive markets, but will take time to gain traction. On the other hand, we anticipate continued explosive growth in the obesity drugs market, but also believe the currently out-of-favour market for Alzheimer’s treatments is approaching an inflection in the second half of the year.

Terri sees a more favourable outlook for Life Sciences & Tools. Lower rates and more M&A could benefit these growth-oriented and fragmented subsectors, coupled with a reset in expectations and more favourable earnings comparisons. While valuations are a little stretched in Core Tools, Contract Research Organizations (CROs), which could be due for re-rating, are an alternative subsector to consider for 2024.

Finally, our analyst Eric Boland has a positive view on the MedTech for this year, supported by strong surgical procedure trends. As well as being relatively insulated from election-year uncertainty, it is typically resilient in economic slowdowns and should benefit from easing input costs as the year progresses. 

The sector was hit by volatility associated with the perceived threat from obesity drugs last year, but we believe these concerns have receded considerably from their peak.

Energy: An unexpected glut

The Energy sector has had a rough start to the year due to concerns around too much supply and the slowing economy.

As our analyst Jeff Wyll observes, the oil supply surprise has come on two fronts. Geopolitical tensions have so far led to little actual disruption: Russian supply, in particular, has declined only modestly. Meanwhile, U.S. production has grown faster than expected—despite the welcome adoption of capital discipline at most of the public oil and gas producers, which have committed to slower growth and higher cash distributions. This reflects improvements in drilling efficiencies and possibly less capital discipline among privately owned producers.

This higher-than-expected production last year prompted further OPEC action to support prices, such as Saudi’s one-million-barrel-per-day output cut, which we expect to be extended in March. Along with heightened tensions in the Middle East, this has helped prop up oil prices above $70/bbl. While higher prices are a positive for the Energy sector, they also remove an incentive to slow U.S. production—and Jeff thinks the market needs to see that U.S. production slowdown to turn positive on the sector.

Natural gas prices have been volatile as North America’s warm December has given way to a colder January. However, our focus remains further out: Medium-term demand trends, particularly for U.S. liquefied natural gas (LNG) exports, could result in a supply deficit and higher prices in 2025 and beyond. We see this as an emerging theme.

Both oil and gas remain cyclical, with self-correcting mechanisms in place should prices undergo a more material move, up or down. In the meantime, valuations have become more attractive and Energy remains a hedge against escalating disruption in the Middle East. In our view, that warrants staying involved in the sector despite what now appears to be a mixed near-term outlook.

Power & Utilities: Energy transition remains key

The energy-transition and electrification themes are dominant in the Power & Utilities sector, in our view, for 2024 and well beyond. They benefit both the cyclical Independent Power Producer (IPP) stocks and the defensive Utilities. Some trends represent a double acceleration of power demand: For example, electric vehicles are not only powered by electricity, but also require significantly more electricity to manufacture than traditional vehicles.

These themes are, in turn, influenced by the IRA, which could be under threat in the event of a Republican win in November—although we note that this vulnerability may be overstated, as a lot of IRA spending is directed at Republican or swing states.

Elsewhere, we anticipate some clarification of the U.S. rules governing the hydrogen market this year and would view that as a likely catalyst to accelerate hydrogen activity in the sector. We think that some power markets, such as Texas, are much tighter than investors are priced for; and, as mentioned already, we see a 2025 tailwind in rising demand for U.S. LNG.

Another emerging theme is the artificial intelligence (AI) revolution: New data centers are upwards of five times more power-hungry than recent vintages. 

Power requirements for AI-related demand may lead to significant challenges for power suppliers. We think this supply-demand imbalance should be an important focus in the coming years for investors, companies, regulators and policymakers.

All that said, we see the economic slowdown as a major risk to the sector in 2024, and for that reason our sector analyst Ronald Silvestri suggests a “barbell” of defensive Utilities and cyclical Pipeline Operators and IPPs (or a focus on one side or the other if you have a strong macroeconomic view).

Utilities endured their worst underperformance in 40 years in 2023 as rates shot up and investors shunned defensive stocks. Valuations are attractive, consolidation is a possibility and the energy-transition opportunity set is substantial, in our view—but selectivity is important, particularly with regard to state-level regulatory risk.

IPPs appear reasonably valued to us, and balance high free-cash-flow generation and leverage to the electrification theme with commodity-price exposure. Pipelines also carry commodity-price exposure, but we believe they are cushioned by increasing capital discipline, strong balance sheets and relatively attractive valuations—and the favourable longer-term outlook for natural gas demand.

A normalisation and a cyclical inflection

The sectors below are, for the most part, more cyclical than the ones we have looked at above. Thinking about their prospects for 2024 provides an important reminder that we have been going through one of the first genuine slowdowns in the business cycle for years—that is, an economic slowdown that does not owe its immediate origins to a bursting investment bubble, a financial crisis or an exogenous event like the pandemic, but to supply and demand in the real economy and the response to monetary policy.

While 2024 is likely to be a year of normalization following the era of zero rates and the pandemic, conditions may nonetheless be new and unfamiliar to many business leaders and market participants. We think that suggests an intriguing set of opportunities.

Technology: Transformative growth, fierce competition

The Technology sector has been one of the biggest investment stories of the past few years, and 2023 was no exception, with Semiconductors and Internet stocks leading the way.

Our Semiconductors analyst Jamie Zakalik calls artificial intelligence (AI) “one of the most significant secular growth developments since the invention of the internet.” Its new prominence gave the chips sector almost the perfect set-up in 2023, coinciding as it did with many companies’ fundamentals hitting their cyclical troughs and starting their recoveries.

Can that incipient earnings recovery justify today’s valuations? We believe so. Semiconductor cycle recoveries have tended to last two or three years, on average, and we believe AI will continue to be a top theme. Jamie tells us to look out for how AI processing evolves from aggregated large-scale AI training to smaller-scale edge and on-device AI inference, for example.

Beyond Semiconductors, AI touches almost the entire sector. In Cloud Computing, firms that can invest aggressively in AI should be able to generate new revenue streams over the next few years. The potential for AI to transform the Digital Advertising experience could counterbalance the sector’s cyclicality somewhat. Generative AI has made search a competitive battleground almost overnight: Intellectual property in search models is still key, but data, brand, distribution and relationships with advertisers remain critical.

But it’s not all about AI.

While our Internet and Hardware analyst Daniel Flax says that Cloud Computing trends remain healthy longer-term, he expects the near-term focus to remain on workload optimization.

 Regulation also remains a key theme in the sector, especially for platform companies, and we closely monitor ongoing investigations and policy shifts. As the sector faces an increased focus on privacy, some of the larger platforms are still well positioned to grow, driven by strong execution on their product roadmaps and their first-party data.

Even in Semiconductors, there are important dynamics in addition to AI. Industry automation, electrification and connectivity remain significant growth opportunities. Meanwhile, different chip markets are going through an asynchronous cycle: We think those first into the correction—such as PCs, smartphones and memory—can continue to recover, to different degrees, through 2024, while markets like communications equipment, industrial and automotive, which came into the slowdown later, could be softer through the first half of this year.

Financials: Banks bounce back, alternative asset managers soar

Election politics, the macroeconomic background and the path of interest rates loomed large in last week’s industry outlook piece. Unsurprisingly, we also see them as key drivers of Financials through 2024.

Bank stocks started 2023 with a crisis, and endured months with an inverted yield curve. They came back to life in the fourth quarter as markets began to price for lower rates, earnings estimates began to stabilize and signs of easing appeared on the regulatory front. Valuations are attractive, but our analysts remain wary of lenders with above-average commercial real estate exposure and are seeking out stocks with potential re-rating catalysts, such as restructuring.

In Insurance, our analyst Chai Gohil is most bullish on Personal Property & Casualty (P&C) insurers, which had a good 2023. Price increases have outpaced losses despite rising inflation, so Chai thinks these businesses can generally continue to expand margins through 2024, justifying current valuations. In contrast, we think the pricing cycle in Commercial P&C has matured and the resulting reorientation to growth could threaten margins.

Chai thinks the Life Insurance sector enjoys clearer tailwinds—unlike banks, they benefit from higher rates as they result in higher investment income and stronger annuity flows. Underwriting trends also seem positive. We continue to monitor the potential impact of the U.S. Department of Labor’s updates to the Fiduciary Rule, as well as the credit quality of the private debt that has gone into many insurers’ investment portfolios over recent years.

As in the rest of the Tech sector, competition in Payments & Fintech remains fierce but rational: Nearly all players are intensely focused on margins and profitability. We think a key differentiator will be the ability to grow software and value-add services as non-transactional sources of revenue, particularly in the face of a potential consumer-spending slowdown. Overall, however, payment volumes remain steady, and some stock valuations are getting support from private equity interest and a comeback in M&A.

Alternative Asset Managers is among our Financials analysts’ highest-conviction subsectors. Many entered 2023 facing concerns about the valuations of illiquid assets, and the potential for waves of fund redemptions that they would struggle to meet. However, valuations held up and fundraising was better than anticipated, sparking a meaningful recovery in share prices. We think a relatively stable macroeconomic background through 2024 should support that recovery by helping asset realizations. We also see several candidates for inclusion in the S&P 500 Index, following Blackstone’s entry in 2023, which could broaden and stabilize the subsector’s investor base.

Consumer: Normalisation after four years of volatility

The macro backdrop is key for the Consumer sector. Optimism is based on strong real wage growth, easing inflation, and the robustness of the consumer’s liquidity and apparent willingness to eat into savings. But our Retail and Ecommerce analyst John San Marco thinks this needs to be tempered by the uncertain employment outlook, mixed signals from the state of the consumer’s balance sheet, and potential lagged impact from interest rate volatility.

As such, we are cautious about areas of spending that are still being over-consumed or where cumulative inflation and price elasticity are creating risks. 

Consumer value and a normalization of the sector’s dynamics after years of pandemic and post-pandemic volatility are key themes for us in 2024.

Much of the risk in Consumer Services is centered in the Discretionary sector. Here, revenue growth is highly dependent on pricing power, and that pricing power appears to be running out as customers cut back on post-pandemic treats—we already see less willingness to trade up when eating out, for example. Retailers should fare better, John argues, as 2024 is likely to be a year of recovery from the extreme pandemic-related volatility and operational challenges of 2022 and 2023: We think wallet share will stabilize this year, and investor expectations are more comfortably achievable in Retail than in Consumer Services.

We are more positive on Staples as a group, as abating currency and commodity headwinds lead to more normalized sales and earnings growth, and investors recognize the sector’s relatively attractive valuations.

Industrials: Quality, with an early-cycle opportunity

In Industrials, inherent cyclicality underscores the importance of the macro background—but the micro matters, too. On the one hand, a general stabilization in manufacturing, normalization of inventories, a general loosening of supply chains and easing in commodity input costs are all supportive. On the other, sourcing semiconductors remains a challenge, and the sector is exposed to key policy debates, especially those impacting the electrification trend and defence.

All that said, our Industrials analyst Evelyn Chow thinks company specifics and known subsector growth drivers are likely to hold the key to outperformance in 2024.

In Aerospace, Defence & Transport, we take a positive view overall and particularly favour aircraft production and its aftermarket, where we see support from growing underlying travel demand and attractive valuations. We also like freight, primarily in the form of rail operators in the nearer term, but with an additional secular growth opportunity in the less-than-truckload (LTL) market. In Autos & Machinery, we are more neutral overall, focused on quality and single-stock opportunities.

Across Diversified Industrials we are moderately positive, favouring potential short-cycle beneficiaries and electricals exposed to the datacenter buildout, as well as quality earnings compounders that could benefit from a more accommodating rate backdrop. Throughout the sector, Evelyn highlights the importance of M&A and spin-off stories, and a preference for margin “self-help” where companies can better control their own destinies.

Access more of our CIO Perspectives here




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