AMZN - Seeking Alpha Readers Predict Tech Health Care Will Have Best Returns For 2024: Are They Right?

2024-01-16 14:49:45 ET

Summary

• Investors polled by Seeking Alpha chose tech as the top sector for 2024, followed by healthcare and energy.
• Outperforming the market is a zero-sum game, and the public tends to love stocks when they're expensive and panic-sell them when they're cheap.
• Measured from near the bottom of the dot-com bust, tech has been the best performing sector by a large margin.
• Consumer staples have historically been the best-performing sector in the market, but only 3.2% of readers chose them for 2024.
• Which sector will be top dog for 2024? Time will tell.

In the short run, the market is a voting machine but in the long run, it is a weighing machine.

-Ben Graham

Last week, Seeking Alpha's Wall Street Breakfast polled thousands of readers on what sector they thought would perform the best in 2024. For the second year in a row, investors chose tech ( VGT ) as the top sector with roughly 33% of the vote. Healthcare (VHT) and energy ( VDE ) came in second and third with 14% each, while financials ( VFH ) came in fourth with a little under 12%. Investors showed comparatively little interest in consumer staples ( VDC ), utilities ( VPU ), and materials ( VAW ), while consumer discretionary ( VCR ) came in dead last in the voting.

There are different ways to interpret polls of investor sentiment. The first obviously would be to consider the " wisdom of the crowd ," the obscure mathematical tendency of a large number of guesses to be close to the true answer in routine situations. The wisdom of the crowd tends to work well for figuring out what the capital of Ohio is, but for obvious reasons, you might not want to try it to solve medical or engineering problems. The second way you could interpret investor surveys like this is as a real-time gauge of fear and greed, and an easy way to bet against the public. The public tends to have a poor understanding of probabilities in general– while they can assess that Alabama is a good football team, they actually do worse than random when picking against the point spread. Similarly, with tech stocks, history shows that the public will love them when they're expensive and panic sell them when they're cheap. The stock market is inherently a competitive venture– for you to beat the market, someone else has to underperform .

Will investors be correct in choosing tech to repeat its historic run in 2023? I'd argue that they won't, but let's look at some historical data.

Investors Top Sector Picks 2023 Vs. 2024

Below we have investors' votes for the top returning sector at this time last year in 2023, and now for 2024. A few things to note:

1. Healthcare is surging in popularity with investors due to hype over Ozempic and other obesity drugs. A quick look at P/E ratios and an understanding of market share math mean that you should immediately be skeptical here.
2. Investors expect tech to be the best performer in most years, and last year was no exception. I'll dig into historical data shortly to argue that while I think they're wrong, this isn't completely unfounded. Tech has been the best-performing sector over the past 20 years by a large margin. Strictly defined, tech also makes up about 30% of the index market cap –and in reality even more, as Amazon ( AMZN ) is classed as consumer discretionary. Also, it's perhaps rational to pick the most volatile sectors as the most likely to perform best in a vote, though it's not necessarily rational to do the same with your money.
3. Energy gets plenty of love from investors as well, but it's the most volatile sector over the past 20 years.

Historical Returns, By Sector

I pulled data on sector ETFs going back to 2005, and the results were somewhat surprising.

Tech has been the top performer with 15% annual compound returns going back to 2005. Financials were the worst performers, in large part due to starting my sample right before the 2008 global financial crisis. Energy stocks and REITs ( VNQ ) were the riskiest, while consumer staples and utilities were the steadiest.

The graph here is a little blurry, but if you click on the above link it will take you to my data source and you can play around with dates and different asset classes.

One surprising insight you get from looking at historical data like this is the importance of quality and profitability. Consumer staples stocks are perceived as boring, but because they tend to deliver steady results with minimal drama, they've been the best-performing sector in relation to the risk you take. Historical data tends to back this up, and longer samples tend to favor technology stocks less.

Note that the X and Y axes here are flipped compared to the previous graph, but again we see consumer staples stocks generally earning the best returns of any sector through multiple business cycles.

Here we see REITs did better over the long run than they did in the last 15-20 years, while tech feels the extra volatility of the dot-com bubble and bust.

As well, we obviously shouldn't blindly look at past returns without placing them in context of past and current valuations. My first sample started in 2005, when finance was America's sexiest industry and tech was humiliated by the nearly 80% bust in the NASDAQ ( QQQ ) after the dot-com bubble burst. Tech was cheap, and financials were expensive given the amount of risk they were taking. We now know in hindsight that tech would crush financial stocks over the following 15 years. But if you look at the longer-run returns, tech and finance stocks have had almost identical risk and returns.

Why Are Consumer Staples Stocks A Perennial Winner?

If you're paying attention, you can probably see where I'm going with this. Consumer staples stocks are historically the best performers and have matched tech stocks' Sharpe ratio (return/risk) even during the bull market of the last 15 years. So why do only 3.2% of Seeking Alpha readers think they'll be the best performer in 2024? That's a good question.

Academic research strongly supports investing in companies with "quality" meaning profitability and reasonable levels of debt. It happens to be that consumer staples stocks tend to fit this mold nicely. Valuation is important as well, as you don't want to blindly buy blue chips and overpay. While this isn't universally true throughout history, I can pull data on consumer staples stocks like Walmart ( WMT ) or Philip Morris ( PM ) and confirm that they generally trade for low valuations.

Walmart, for example, traded around 10-13x PE for much of the 2010s– now the stock is in fashion with investors and trading closer to 25x PE, but the opportunity was there for a long time. Philip Morris ( PM ) was 7x earnings after the crisis– I can't see how you lose investing in a staples company with a valuation like that. Altria ( MO ) is currently a hated stock– with an 8.5x PE ratio and two presidential candidates in the US that will likely have to back off any anti-tobacco pledges to squeak out the electoral vote. Monster Beverage ( MNST ) is one of the biggest winners in the entire market over the past 50 years. Anheuser Busch ( BUD ) stock is perking up lately as well– they're starting to work to rehabilitate Bud Light's image with endless commercials of Peyton Manning and Emmitt Smith.

Today most of these stocks are fairly expensive– they're not strong buys. But the Wall Street Breakfast survey was about what stocks would perform the best in 2024. I'm going to vote for consumer staples because these stocks perform best in a recession. In 2008, VDC lost about 17% including dividends, while the S&P 500 ( SPY ) lost about 37%. The next bear market doesn't have to follow the script of the last one, but I wouldn't be surprised to see a similar downturn for the S&P with the staples sector only down about half as much as the broad market. There's a game theory component to staples stocks– if you put money in consumer staples stocks and you're wrong, you don't tend to get crushed. Tech offers great reward if you can time the cycle, but also crushing defeats for investors who bought at the wrong time.

Bottom Line

I'm not endorsing blindly buying consumer staples stocks as I think many of them are overvalued as well, but only 3.2% of Seeking Alpha readers picked staples, even though they're the best-performing sector historically and the most likely to lose the least in an economic downturn. Tech was the runaway top choice for investors, but history shows that tech stocks tend to boom and bust. The best option for investors isn't to bet on sectors like they're football teams but to pay attention to valuations, profitability, and quality while being willing to be a contrarian.

For further details see: