Stocks have breached record highs, which is perhaps a mixed blessing. We could be in the midst of a market “melt-up,” which marks the frenzied end stage of an asset bubble. A melt-up is typically followed by a significant downturn.

The three main U.S. stock market indices soared Monday, on optimism that the “phase one” trade deal between the U.S. and China marks a substantial easing of the trade war. The Dow Jones Industrial Average rose 100.51 points (0.36%), the S&P 500 rose 22.65 (0.71%), and the tech-heavy NASDAQ rose 79.35 (0.91%).

As of this writing Tuesday morning, all three indices were trading in the green.

Fueling the record-breaking rally in recent days are renewed hopes for an end to the trade war. Hence the danger. As I wrote in yesterday’s column, phase one contains far less substance than advertised.

Read This Story: The Markets: Looking Backward, Moving Forward

In my view, when it comes to the trade war, Wall Street has been partaking of the “hopium” pipe.

Hopium is a term that I like to use for unrealistic hopes that are pursued like an addictive drug. Hopium is a habit that clouds your judgment and it’s deadly for your portfolio. Below, I’ll show you the hard data that really matter and the right moves to make now. But first, let’s examine the context for the market’s upward trajectory.

The White House has approved a partial trade deal that defers new tariffs on $160 billion a year in Chinese-made goods. The tariffs were due to take effect December 15. The Trump administration also agreed to reduce existing tariffs on Chinese goods, halving tariffs on more than $100 billion a year worth of products.

In return, China has agreed to buy large amounts of U.S. agricultural goods, giving partial relief to hard-hit farmers in the American heartland.

The trade deal’s boosters are claiming victory. But look closer. The Chinese are merely back to where they started, buying agricultural products while selling us valued-added manufactured goods.

As part of the deal, China is supposed to spend at least $16 billion more on agricultural goods in each of the next two years, with the goal of nearly doubling overall U.S. exports to China. Experts say these volumes are unrealistic. Nor has China publicly committed to specific targets.

Consumers, corporations and farmers continue to pay the heavy costs of existing tariffs that remain in place. Despite massive federal aid, U.S. farms are going under at a record rate because of lost sales to China, with bankruptcies up 24% this year.

Meanwhile, the phase one deal doesn’t solve more complex issues, such as China’s expropriation of U.S. intellectual property and patents. It’s true that the Chinese flout trade rules, but the trade war has not reined them in.

The phase one trade deal is a victory not for the U.S. but for the Chinese. Beijing stood firm for several months and eventually gave up nothing. I point this out, because you should harbor no illusions when making investment decisions.

The numbers that matter…

But let’s put aside the trade war and focus on corporate earnings. That’s where the rubber meets the road.

According to the research firm FactSet, the projected year-over-year earnings growth rate for calendar year (CY) 2019 is 0.3%, which is below the 10-year average annual earnings growth rate of 9.1%. If 0.3% turns out to be the actual growth rate for the year, it will mark the lowest annual growth rate for the index since CY 2015 (-0.6%). The chart tells the story:

Six sectors are projected to report year-over-year growth in earnings, led by the utilities and health care sectors. Five sectors are expected to report a year-over-year decline in earnings, led by the energy and materials sectors.

The utilities and health care sectors are expected to report the highest year-over-year earnings growth of all 11 sectors at 8.3% each. Within the utilities sector, all five industries are expected to report growth in earnings, led by the independent power and renewable electricity producers (50%), multi-utilities (11%), and gas utilities (10%).

Within the health care sector, all six industries are predicted to report growth in earnings, led by health care providers & services (10%), health care equipment & supplies (9%), and life sciences, tools, & services (9%).

The estimated year-over-year revenue growth rate for CY 2019 is 3.8%, which is above the 10-year average (annual) revenue growth rate of 3.3%. Eight sectors are expected to report year-over-year growth in revenues, led by the health care and communication services sectors. Three sectors are expected to report a year-over decline in revenues, led by the materials sector.

The health care sector is expected to report the highest (year-over-year) revenue growth of all 11 sectors at 13.4%. At the industry level, all six industries in this sector are projected to report revenue growth for the year. However, health care providers & services is the only industry that is predicted to report double-digit revenue growth (18%).

International exposure weakens profits…

And how has the trade war affected corporate top and bottom lines? The way Kryptonite affects Superman.

In CY 2019, S&P 500 firms with more international revenue exposure are projected to post weaker earnings relative to S&P 500 firms with less international revenue exposure.

For S&P 500 companies that generate more than 50% of revenue outside the U.S., the estimated earnings decline for CY 2019 is -6.1%. For S&P 500 companies that generate more than 50% of revenue inside the U.S., the estimated earnings growth rate for CY 2019 is 3.5%.

The takeaway: You should increase your exposure to the utilities and health care sectors, which tend to perform well during the late stage of the economic cycle.

As many analysts call for a recession next year and the bull market gets long in the tooth, investors should rotate toward “essential services” plays that provide products and/or services that people can’t live without.

Utilities and health care are classic essential services plays. Regardless of economic cycles and market ups and downs, everyone needs electricity and everyone gets sick.

Utilities stocks year to date have been outperforming the broader market and health care sector, but you can still find bargains among utilities. For our research team’s latest “dividend map” of value plays in the utility sector, click here.

If the market is truly in “melt-up” mode, a downturn probably awaits us in early 2020. The utilities and health care sectors are positioned to withstand the rough patch.

John Persinos is the managing editor of Investing Daily. He also edits the premium trading service, Utility Forecaster. Reader letters are welcome: mailbag@investingdaily.com