You hear a lot of financial analysts crow about how correct they were in making certain predictions. Of course, they typically cherry-pick their predictions and neglect to mention the ones where they blew it. My motto has always been: I don’t necessarily want to be “right.” I want to make money.

Will the broader stock market rebound in the fourth quarter? Maybe. Maybe not. But you’ll increase your odds of reaping market-beating gains in the coming months, if you position your portfolio along the lines that I suggest below. As I’ll explain, stock market laggards are poised to become leaders.

The resolute stance of the Federal Reserve has elevated bond yields, deflating the market’s momentum this autumn. Nevertheless, inflation is moderating, corporate profits are staging a recovery, and the end of Fed tightening approaches, all of which suggests that a favorable outlook beckons for the remainder of the year.

My optimism for the fourth quarter is especially manifest in segments of the stock market that have been underperforming.

The resurgence in earnings supports a positive view. Elevated material and labor expenses had exerted pressure on corporate profits, causing a decline of approximately 8% in S&P 500 earnings from their peak the previous year. However, the actual impact was less severe than anticipated, as corporate revenues surged, underpinned by a resilient economy. Consumers have continued to spend, as jobs growth stays healthy.

Third quarter earnings season, following three consecutive quarters of decline, represents a pivotal moment. As we’ve seen in recent days in the technology sector, earnings are rebounding compared to the previous year. Analysts expect this earnings recovery to extend into 2024, paving the way for a broader upward trajectory of stocks.

That said, high interest rates pose challenges to equity valuations. Valuations for U.S. large-cap stocks have surged over the past year, primarily driven by mega-cap technology stocks, which have harnessed the mania over artificial intelligence (AI). In recent weeks, the mega-caps have handed back some of those gains amid rising bond yields.

Given the likelihood of sustained higher interest rates, further expansion of valuations may encounter headwinds. Accordingly, earnings growth will shoulder the primary burden in propelling the markets forward.

We’ve been going through a rough patch this autumn. The main U.S. stock market indices closed mostly lower Friday as follows:

• DJIA: -1.12%
• S&P 500: -0.48%
• NASDAQ: +0.38%
• Russell 2000: -1.21%

All four major averages posted steep weekly losses. Beyond the giant Silicon Valley “story stocks,” which have enjoyed a strong run-up this year, valuations are more reasonable in other sectors, offering prospects for sector diversification.

The S&P 500, heavily influenced by its 10 largest companies in terms of market capitalization, has appreciated by approximately 12% since the year’s outset.

In contrast, the S&P 500 Equal Weight Index, which allocates an equal weight to all included stocks, has performed less well, highlighting the limited breadth of participation (see chart):

Other sectors within the equity market, such as small-cap stocks and value-style investments, have the potential to narrow the gap and regain lost ground.

Investors should adopt a balanced equity allocation, leveraging sector setbacks as opportunities to diversify across underperforming asset classes.

One such underperforming sector to consider now is utilities, which have gotten clobbered by high interest rates.

Read This Story: Q3 Earnings: Strong Medicine for Frayed Nerves

To be sure, even a fundamental metric such as earnings must be scrutinized with healthy skepticism. A company can “win” the earnings game and enjoy a higher share price by purposely low-balling estimates and then posting unexpectedly positive numbers. But winning the earnings game is of dubious use in predicting a company’s future competitiveness and cash flows.

Utilities stocks are known for their ability to generate steady and dependable cash flows over time. This is because utilities companies provide essential services such as electricity, water, and gas, which people and businesses rely on irrespective of economic conditions.

In good times, these services remain in demand, and during economic downturns, they continue to be essential, ensuring a reliable revenue stream for utilities companies. This resilience makes utilities stocks an attractive investment choice for individuals and investors seeking stability and consistent returns over the long haul.

On Friday, we got good news on the inflation front. The personal consumption expenditures price index (PCE) was 3.4% on an annualized basis in September, the U.S. Bureau of Economic Analysis reported. This reading matched the August reading (revised from 3.5%) and came in line with the consensus expectation.

The annual “core” PCE, which strips out energy and food and serves as the Fed’s preferred gauge of inflation, rose 3.7%, a slightly milder pace than the 3.8% (revised from 3.9%) increase recorded in August. On a monthly basis, the headline PCE and core PCE rose 0.4% and 0.3%, respectively.

As inflation cools, the Fed is expected to cut rates in mid-2024, which would be a boon for stocks overall and especially for rate-sensitive assets such as utilities. This year’s worst performers, e.g. utilities and real estate investment trusts (REITs), will probably bounce back the most after a Fed pivot.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

Do you seek peace of mind in today’s uncertain investment climate? As you position your portfolio for 2024, turn to utilities stocks. These stable, high-dividend stalwarts provide shelter from the storm.

Utilities stocks offer growth, income and asset protection. That’s an unbeatable investment “trifecta.” But you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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