Can financial, healthcare and energy stocks rise while rates remain high?

Big banking stocks like Berkshire Hathaway Inc. New York Stock Exchange: BRK.BJP Morgan Chase & Co. New York Stock Exchange: JPMand Citigroup Inc. NYSE:C have risen over the past month as it has become clear that interest rates will remain high for the foreseeable future.

The SPDR fund for the selected financial sector NYSEARCA: XLF it rose 2.86% over the past month, as banks are among the sectors benefiting from higher rates.

Healthcare and utilities also tend to outperform during higher rate cycles.

Energy has historically done this too, but in 2024 the sector has some things going against it.

Here’s a look at some of the dynamics driving industry performance in an era of “better for longer.”

Are healthcare stocks a recipe for profit?

Healthcare stocks have some defensive elements, as they are somewhat resistant to inflation. Demand remains stable for medical services and products regardless of economic conditions. Factors such as an aging population, advances in medical technologies and essential healthcare needs help support demand.

It helps that many procedures and treatments are covered by health insurance; with less to pay out of pocket, consumers will seek treatment regardless of what the Federal Reserve says about interest rates.

Leading stocks in the SPDR Health Care Select Sector Fund NYSEARCA: XLV in the last month I am Catalent Inc. New York Stock Exchange: CTLTEdwards Lifesciences Corp. NYSE:EW and Intuitive Surgical Inc. NASDAQ:ISRG.

One factor that could work in the healthcare industry’s favor this year: If financing costs remain stable, the industry could see more consolidation through merger and acquisition deals, which often drive stock prices higher.

Will utilities increase their power in 2024?

Growth investors typically find utilities stocks rather boring, as there isn’t the rapid growth found in technology or communications stocks like Meta Platforms Inc. NASDAQ: META or Alphabet Inc. NASDAQ:GOOGL.

Utilities are highly sensitive to interest rates, although demand remains stable regardless of the rate situation. These are capital-intensive businesses, especially these days, as there is pressure to upgrade an aging power grid due to rising electricity consumption. This means that higher lending rates can eat into profitability.

On the other hand, businesses keep electricity and gas running, as do residential customers, even when rates are high. This means revenue is stable, although weather factors, such as a warmer-than-usual winter, can impact revenue growth.

Utilities pay higher dividends than other sectors and can also be considered a proxy for bonds. The Utilities Select SPDR fund NYSEARCA: XLU has a dividend yield of 3.6%, higher than that of the iShares Core US Aggregate Bond ETF NYSEARCA: ADD.

The utilities sector has not performed well so far in 2024, but Wall Street expects earnings growth this year and next, even as regulators will closely monitor proposed rate hikes needed as part of the larger need for capital investments.

Will energy stocks tank in 2024?

The fate of energy stocks is largely determined by oil prices, which have been trending lower since the end of September.

Energy stocks can perform well in high interest rate environments due to their correlation with economic growth. Rising rates can mean a strong economy, which increases demand for energy. While the economy remains strong, other factors are impacting the performance of SPDR Energy Select Sector Fund stocks NYSEARCA: XLE.

Going into 2024, excess capacity is putting downward pressure on oil prices as geopolitical concerns continue to rear their heads.

Investors typically don’t gravitate toward energy stocks when capacity is high. This makes sense, given the dynamics of supply and demand. Why pay for a product that sits in the warehouse, unused?

“History is cruel to oil stocks when there is spare capacity in the system,” Citi analyst Alastair Syme wrote in a recent note.

On a monthly basis, the top performing companies in the energy sector are Marathon Petroleum Corp. New York Stock Exchange: MPCPhillips 66 New York Stock Exchange: PSX and Valero Energy Corp. New York Stock Exchange: VLO.

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