Can financial, healthcare, energy stocks rise as rates stay high?

Large bank stocks such as Berkshire Hathaway Inc. NYSE: BRK.B, JPMorgan Chase & Co. NYSE: JPM, and Citigroup Inc. NYSE: C are up in the past month as it’s become clear that interest rates will remain high for the foreseeable future. 

The Financial Select Sector SPDR Fund NYSEARCA: XLF is up 2.86% in the past month, as banks are among industries benefiting from higher rates. 

Healthcare and utilities also tend to outperform during cycles of higher rates. 

Energy does, too, historically, but in 2024, the sector has a few things working against it. 

Here’s a look at some of the dynamics driving sector performance in an era of “higher for longer.” 

Healthcare stocks a prescription for profit?

Healthcare stocks have some defensive elements, in that it’s somewhat resistant to inflation. Demand remains steady for medical services and products regardless of economic conditions. Factors like an aging population, advances in medical technologies and essential healthcare needs contribute to sustained demand. 

It helps that many procedures and treatments are covered by health insurance; with less to pay out of pocket, consumers will seek treatment regardless of what the Federal Reserve is saying about interest rates.

Leading stocks in the Health Care Select Sector SPDR Fund NYSEARCA: XLV in the past month are Catalent Inc. NYSE: CTLT, Edwards Lifesciences Corp. NYSE: EW and Intuitive Surgical Inc. NASDAQ: ISRG. 

One factor that may work in healthcare’s favor this year: If borrowing costs remain steady, the industry may see more consolidation through merger and acquisition deals, which frequently sends stock prices higher. 

Will utilities power higher in 2024?

Growth investors typically find utility stocks to be rather dull, as there’s not the fast growth you find with technology stocks or communications-sector stocks like Meta Platforms Inc. NASDAQ: META or Alphabet Inc. NASDAQ: GOOGL. 

Utilities are highly sensitive to interest rates, although demand remains steady regardless of where rates stand. These are highly capital-intensive businesses, particularly these days, as pressure is on to update an aging power grid amid increased electricity usage. That means higher rates for borrowing can put a dent in profitability.

On the other hand, businesses keep the electricity and gas running, as do residential customers, even when rates are high. That means income is steady, although weather factors, such as a warmer-than-usual winter, can affect revenue growth.

Utilities pay higher dividends than other sectors, and can even be considered bond proxies. The Utilities Select Sector SPDR Fund NYSEARCA: XLU has a dividend yield of 3.6%, higher than the iShares Core U.S. Aggregate Bond ETF NYSEARCA: AGG.

The utilities sector hasn’t performed well thus far in 2024 but Wall Street expects earnings growth this year and next, although regulators will carefully monitor proposed rate increases, which are necessary as part of the greater need for capital investment. 

Energy stocks running on fumes in 2024?

Energy stocks’ fates are largely determined by oil prices, which have been trending lower since late September. 

Energy stocks can perform well in high-interest-rate environments due to their correlation with economic growth. As rates rise, it can signify a strong economy, increasing energy demand. While the economy remains robust, other factors are affecting performance of stocks in the Energy Select Sector SPDR Fund NYSEARCA: XLE.

In 2024, excess capacity is putting downward pressure on oil prices, while geopolitical concerns continue to rear their head. 

Investors typically don’t gravitate toward energy stocks when capacity is high. That makes sense, given supply-and-demand dynamics. Why pay up for a product that’s sitting around in storage, unused?

“History is unkind to oil equities when there is spare capacity in the system,” Citi analyst Alastair Syme wrote in a recent note.

On a one-month basis, top performers in the energy sector are Marathon Petroleum Corp. NYSE: MPC, Phillips 66 NYSE: PSX and Valero Energy Corp. NYSE: VLO.