Investing.com – Wells Fargo analysts suggest that now is a good time for investors to consider selling given the recent rally in the utilities sector. This sector was among the best performing sectors since the beginning of the year until September 24, sharing the spotlight with high-growth sectors such as information technology and communications services.
The rally in utilities, a traditionally defensive sector, reflects unusual market dynamics driven by ongoing economic uncertainty and investor demand for stability.
However, Wells Fargo analysts believe now is the time to capitalize on these gains, citing multiple factors that point to potential weakness in the utility’s performance in the near future.
The main reason behind this recommendation lies in the expected shift in macroeconomic conditions. Wells Fargo forecasts predict a soft landing for the U.S. economy, with gradual growth resuming over the next 12 to 18 months.
As uncertainty over the Federal Reserve’s easing cycle and the upcoming presidential election dissipates, the broader market is expected to shift toward growth-oriented sectors.
This shift is likely to weaken the relative attractiveness of utilities, which typically thrive in more uncertain or stagnant environments because of their stable cash flows and profits.
Another major headwind for the utilities sector is the persistence of relatively high interest rates. The Wells Fargo team expects that even with the Fed’s recent cuts, interest rates will remain higher than in previous cycles, which could create pressure on the sector.
Utilities are highly leveraged, making them sensitive to borrowing costs. Higher interest rates can increase interest expenses, reducing profitability. In addition, rising yields in the fixed income market could attract investors away from utilities, which are traditionally seen as playing a role in yield, thus intensifying competition in the sector for capital.
Historical trends also support this view. According to a Wells Fargo analysis, the utility sector often underperformed after the Federal Reserve’s first rate cut in an easing cycle, as well as after a presidential election.
The data show that since 1989, utilities have underperformed the broader level in six out of eight years after elections and in five out of six cycles after the first Fed rate cut.
This weak performance is likely related to investors shifting to more growth-focused and cyclical sectors during periods of economic recovery.
In light of these factors, Wells Fargo recommends reallocating capital from utilities to more growth-oriented, cyclical sectors. Sectors highlighted for their positive outlook include the energy sector, which the company rated as “most favorable”, along with telecommunications services, financial services, industrials and materials.
These sectors are expected to benefit most from the resumption of economic growth and can provide investors with better opportunities to raise capital in the current market environment.
This tactical guidance is consistent with Wells Fargo’s broader investment strategy, which emphasizes positioning portfolios for the next phase of the economic cycle. Investors who enjoyed the rally in utilities may find this a good opportunity to pivot to sectors that are poised to perform better as the economic landscape shifts toward recovery.