Investors are starting to worry that strong economic growth will delay the Federal Reserve’s intended interest rate cuts. Wall Street also is getting skittish about worsening geopolitical risk, as the Russia-Ukraine bloodbath deepens, Houthi rebels disrupt vital Red Sea shipping, and the Israel-Hamas war spreads through the Middle East.

But earnings growth just might come to the rescue. Corporate profitability is the clarity that cuts through the news media’s noise; it’s where the rubber hits the road.

Positive projections for operating results have the potential to offset other risks and anxieties in the markets. Below, I conduct a deep dive into earnings projections. I also look at the profitable opportunities poised by one sector in particular: utilities.

The utilities sector is set to thrive in 2024 due to a convergence of factors. The integration of smart technologies, a commitment to renewable energy, supportive regulatory environments, the rise of electric vehicles, and the inherent resilience of the sector all contribute to its bullish outlook. What’s more, falling interest rates are a boon for utilities stocks. But first, let’s look at the macro picture.

WATCH THIS VIDEO: Stocks Get Off to a Shaky Start in 2024

The estimated year-over-year earnings growth rate for S&P 500 companies in the fourth quarter of 2023 is 1.3%, according to research firm FactSet. If 1.3% turns out to be the actual growth rate for Q4, it would represent the second consecutive quarter of year-over-year earnings growth reported by the index.

That level of profitability may seem modest, but keep in mind, many analysts last year worried about an economic slump and earnings recession. Also, those projections are likely to get revised upwards as economic growth accelerates.

For Q4 2023 earnings season so far, with 21 S&P 500 companies reporting actual results, 19 S&P 500 companies have reported a positive earnings surprise and 12 S&P 500 companies have reported a positive revenue surprise.

The earnings picture gets even better this year. The estimated year-over-year earnings growth rate for calendar year 2024 is 11.7%, which is above the trailing 10-year average annual earnings growth rate of 8.4% (2013 – 2022).

For Q4 2023, five of the eleven S&P 500 sectors are expected to report year-over-year earnings growth, led by communication services, utilities, and consumer discretionary. Six sectors are expected to report a year-over-year decline in earnings, led by energy, health care, and materials.

Electrifying growth…

The rebound of utilities underscores a major opportunity as 2024 unfolds. Utilities stocks were the biggest losers last year, posting a decline of 7.2%. The main culprit was rising interest rates. However, the sector’s recovery started in Q4 with a quarterly gain of 8.5%, amid optimism that the Fed will cut rates sometime in 2024.

Utility stocks are hurt by rising rates because they must compete with safer high-yield bonds. Higher interest rates also make debt more expensive for utilities, which are capital intensive. But we’re finally seeing a reversal of that trend.

The benchmark PHLX Utility Sector Index (UTY) has shaken off its slump and currently hovers above its 50-day moving average and very near its 200-day moving average (see chart, with data as of market close January 9):

The utilities sector in Q4 is expected to report the second-highest year-over-year earnings growth rate of all eleven sectors at 33.7%. In the vanguard of this projected growth is the subset of electric utilities.

The electric utilities industry is predicted to be the largest contributor to earnings growth for the sector at 59%. If this industry were excluded, the utilities sector would be projected to report a year-over-year decline in earnings of -0.3% rather than year-over-year earnings growth of 33.7%.

Interest rate sensitive assets that were hammered last year by rising rates, e.g. utilities stocks and real estate investment trusts (REITs), are poised to shine in the coming months.

If utilities sustain their solid Q4 performance into 2024, it will be at least partly due to their safe-haven status amid global economic uncertainty.

As for the broader market, the main U.S. stock market indices closed mostly lower Tuesday, as follows:

• DJIA: -0.42%
• S&P 500: -0.15%
• NASDAQ: +0.09%
• Russell 2000: -1.05%

After the powerful rally we saw in the last two months of 2023, it stands to reason that stocks would take a breather in the beginning of the new year. The big banks will kick off Q4 earnings season in earnest this coming Friday. Stay tuned.

Editor’s Note: I always keep a close eye on utilities investments. Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

For the reasons I’ve cited in the above article, now’s the time to increase your exposure to utilities stocks. As rates continue their descent, the recovery of high-yielding utilities stocks will gain traction.

But you need to look beyond just yield. A high yield can be a good place to start evaluating stocks with high dividends, but it should never be the only reason you buy. You need to dig deeper and look for companies that can clearly maintain, and preferably grow, dividends over time.

The good news is, Robert Rapier has done the homework for you. For his carefully vetted list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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