Tech stocks are too hot. Consider these potential gems instead.

Non-tech stocks didn’t perform as well. The Invesco S&P 500 Equal Weight ETF, which serves as a better gauge of the average stock’s performance, has gained 5% this year. But investor disinterest in many of these sectors appears to have already shown, and so they may be poised to outperform.

The value of the equal-weighted index is about 30% of that of the S&P 500, down from a peak of nearly 40% during the pandemic, according to Bank of America. It was last close to 30% in early 2009, the lowest level reached, before the equal-weighted index outperformed for several years.

Outperformance this year could come as the non-tech sector continues its moderate gains, while investors sell the technology sector – and cause stocks to fall – taking profits.

This is a highly plausible outcome, as profits across all sectors are expected to continue to grow. Analysts expect, in total for the equal-weighted index, sales to grow about 4.9% annually from the end of last year through 2026, according to FactSet.

This is happening as the economy continues to add jobs and total consumer spending increases. Since product costs and wages are not expected to increase as they did right after the pandemic, profit margins are expected to increase slightly. Income can increase by around 10% per year.

But the thesis relies on a few related factors. The market is hoping that the Federal Reserve will not have to raise interest rates further as the inflation rate has fallen from its peak. This would allow economic growth to continue, even if it slows.

A rate cut would boost stocks, although a scenario with too many cuts could hurt the market because it would likely involve the economy entering a recession. Overall, the market wants economic growth to be moderate, but not scorching.

Across the market, S&P 500 industrials, particularly equipment and component manufacturers, could extend their 9% gain for the year.

Analysts expect the sector to see sales and profit growth a few percentage points higher than the rest of the market as industrials benefit from new higher growth trends. They sell products to electric vehicle manufacturers and clean energy projects, which replace automobiles and traditional energy. Many manufacturers also sell additional or more expensive parts to other manufacturers due to industrial automation.

Elsewhere, the S&P 500 healthcare sector, up just 4% this year, looks interesting. Investors in this sector do not have to worry about the impact of interest rates on the economy, since the demand for medicines, treatments and medical care is constant.

The sector’s sales and profits are expected to grow over the next few years. For example, its second weighting is

UnitedHealth Group
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which analysts expect to generate sales growth of 7% annually through 2026 to reach $458 billion.

Although insurance premium pricing remains a question mark, the number of new seniors enrolling in UnitedHealth plans increases each year. The company is buying back shares, reducing the number of shares, supporting the 12% annual earnings per share growth forecast by analysts.

Take a look at all the potential gems outside of tech.

Write to Jacob Sonenshine at [email protected]