Investing.com -- Investors should favour stock in health care, consumer staples and consumer discretionary sectors when economic growth slows below 2%, according to a Jefferies, while avoiding energy and communication services, which tend to underperform.
Jefferies maintained its sector strategy despite cutting its earnings growth forecasts and targets, citing weak revision trends and deeper cuts in cyclical sectors.
Based on historical performance in low-growth years, Jefferies found health care stocks tend to deliver the strongest returns, often in double digits.
Staples and discretionary sectors also fare well in such environments.
In contrast, communication services and energy typically lag and remain in negative territory.
The firm is overweight health care but remains underweight on the two consumer sectors due to balance sheet concerns and valuation.
Despite recent losses, health care has outperformed the broader small-cap index this year, supported in part by an uptick in M&A activity, which has been “above trend,” especially in deals under $1 billion.
Meanwhile, energy has been among the worst performers, down 30% since late November, worse than average even in early-recession periods.
Jefferies noted that small-cap earnings expectations for 2025 have dropped sharply, led by cyclicals, energy, and materials.
Utilities, despite holding up well, are now the most expensive sector, followed by tech stocks.
Jefferies favors financials and industrials on valuation grounds but warns that strong ETF flows into utilities and tech may have made those sectors crowded trades.