Will Strong Q4 Performance Recur? Analysts Eye Cyclical Stocks

Moomoo News Global wrote a column · Sep 23 20:24

With five trading days left in September, this year might defy the September curse. As of last Friday's close, all three major indexes posted monthly gains. The $S&P 500 Index (.SPX.US)$ rose 0.96%, the $Nasdaq Composite Index (.IXIC.US)$ advanced 1.32%, and the $Dow Jones Industrial Average (.DJI.US)$ gained 1.20%.

Strong Historical Performance in Q4

The fourth quarter is typically a standout period for U.S. equities. Over the past 30 years, the S&P 500 has risen more than 60% of the time in Q4, with an average monthly gain exceeding 1%.

Will Strong Q4 Performance Recur? Analysts Eye Cyclical Stocks

Additionally, Q4 encompasses two major holidays—Thanksgiving and Christmas—which may foster investor optimism and translate into stock returns.

However, election years can introduce greater uncertainty. According to Bank of America research, market performance in October of election years is slightly better than in September, though significant downside risk remains. Post-election, November and December tend to perform well, with December seeing an uptick more than 80% of the time.

Cyclical Stocks Win Analyst Favor

Over the past decade, fourth-quarter performance analysis reveals financials, materials, and industrials as top gainers. These cyclical sectors posted average gains of 8.9%, 8.9%, and 7.5%, respectively.

Source: Wind

Last week, the Federal Reserve initiated its first rate cut in four years. Traditionally, rate cuts prompt buying in defensive sectors such as consumer staples, healthcare, and utilities. However, analysts are taking a different view this time.

Morgan Stanley strategist Michael Wilson advises investors to take profits on U.S. defensive stocks, as their recent strong performance has elevated valuations. He wrote in a report, "Taking profits on the recent outperformance of defensives makes sense in the absence of knowing the outcome of the next labor report."

Frank Monkam, senior portfolio manager at Antimo, said, "With the Fed opting for a jumbo cut amid quite loose financial conditions, it’s a clear signal for equity investors to position rather offensively." He added, "The traditional play of defensive stocks, such as buying utilities or consumer staples, could fail to see much traction."

Since the end of June, Citigroup’s basket of defensive stocks has climbed about 11%, outperforming a comparable cyclical stock index, which rose 8.5%.

Several analysts recommend that investors turn their attention to cyclical stocks.

Citi strategists, including Beata Maanthey, believe that extreme earnings downgrades have made select cyclical stocks look attractive again. In a report, they noted, "The Fed's latest cuts and hopes of a soft landing have started to shift the balance of risks incrementally toward Cyclicals, where the usual seasonal bounce around 4Q could also help." They expect earnings per share for cyclicals to rise by 6% in 2024 and over 10% in 2025.

David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, is bullish on financial and industrial stocks, which are closely tied to a strong economy.

Walter Todd, President and Chief Investment Officer at Greenwood Capital Associates LLC, sees investment opportunities in financial stocks. He said, "This lowering of rates by the Fed should lower their cost of funding. They should have to pay less on deposits than they were two days ago, so that should help their net interest margin."

In terms of capital flows, investors are currently pouring back into large-cap tech stocks and other growth sectors. According to Goldman Sachs brokerage data, hedge funds last week made net purchases of U.S. technology, media, and telecommunications stocks at the fastest pace in four months.

Source: Bloomberg

by moomoo News Olivia

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