Stocks that are resistant to recession are driving the market’s recent gains

Stocks have rebounded from a rough April, with Utilities (XLU) and Consumer Staples (XLP) leading the charge. Since April 16, Utilities have surged nearly 12%, while Consumer Staples have risen almost 5%, outperforming the S&P 500’s 2.7% increase.

Wall Street strategists attribute this rebound to a rotation into sectors that had previously underperformed. Truist co-CIO Keith Lerner noted that both Utilities and Consumer Staples had been among the worst performers in the S&P 500 over the last year, presenting a buying opportunity for investors.

The Utilities sector, in particular, saw a significant discount to the S&P 500 in terms of valuation, while Consumer Staples had underperformed by almost 30% over the last year. This prompted investors to seek out defensive sectors that could potentially hold up better in case of a market correction.

Fundamentally, Utilities have seen a 26.7% increase in earnings this quarter compared to last year, the second-highest growth rate among sectors. Additionally, macro factors such as the Fed’s dovish stance on interest rates and weaker-than-expected economic data have contributed to the sector’s rise.

While the recent surge in Utilities and Consumer Staples may not be sustainable, it reflects investors’ cautious approach amid uncertainties in the market. Charles Schwab senior investment strategist Kevin Gordon highlighted the mixed signals in the market, with different sectors showing varying trends.

As investors navigate the market landscape, the performance of defensive sectors like Utilities and Consumer Staples will continue to be closely watched for clues on market sentiment and potential shifts in investment strategies.