While the stock market has reached "overbought" levels, five sectors still offer additional upside potential even at this late stage, says Quincy Krosby, chief market strategist at Prudential Financial, which has $1.5 trillion in assets under management (AUM). Krosby says these are industrials, financials, consumer discretionary, health care, and energy. The market continues to advance, she says, because investors do not want to be left out, and are quick to seize on any bit of positive news, according to a detailed story in Business Insider as outlined below.

The S&P 500 Index (SPX) is up by 18.3% year-to-date through Tuesday's close, and two of these sectors dramatically trail the broader market. Their YTD gains are, per S&P Dow Jones Indices: industrials, 20.1%, financials, 17.0%, consumer discretionary, 20.2%, health care, 4.9%, and energy, 5.0%.

Significance For Investors

"Industrials have really been damaged by the trade war and the stronger U.S. dollar, and add to that slower global economic growth," Krosby said, indicating that positive news on any of these fronts would boost these stocks further. Despite the headwinds, it's notable that the industrial sector has outperformed the broader market, as indicated above.

Key Takeaways

  • The stock market is "overbought," but 5 sectors still have upside.
  • Health care and energy are laggards with potential gains ahead.
  • Industrials, financials, and consumer discretionary can keep rising.
  • Most economic data for the U.S. is still looking strong.
  • However, the Cass Freight Index signals a likely downturn ahead.

Any positive economic news--or sustained economic improvement--could be a big catalyst. The Bloomberg Economic Surprise Index has hit its highest level in 11 months, while a similar index produced by Citigroup is registering its most optimistic reading since April 2018, per Bloomberg. “It says things are getting better,” says Jim Paulsen, chief investment strategist at The Leuthold Group, per Bloomberg. “There’s a definitive change in the growth profile and there’s an acceleration in growth," he added.

The two big laggards are health care and energy, per the figures above. With respect to energy, Krosby finds the large, integrated companies to be attractive, largely on the basis of strong cash flows and dividend yields.

Regarding health care, Krosby notes these stocks have been depressed by investor concerns about the potential passage of a "Medicare for All" program and drug price regulations, should Democrats take control of both houses of Congress and the presidency in the 2020 elections. She believes that life sciences and medical equipment companies are especially attractive segments of the health care sector that also are less exposed to those risks.

Sarat Sethi, managing director and portfolio manager at Douglas C. Lane & Associates, a investment advisory firm with $5.8 billion in assets under management, also finds financial and energy stocks to be attractive, Barron's reports. On energy stocks he said: "It’s a good example of an area that’s underappreciated and underowned, but we’re being cautious as there are headwinds from tariffs." Sethi's also likes several financial stocks, including Blackstone Group Inc. (BX) and JPMorgan Chase & Co. (JPM).

Looking Ahead

To be sure, economic indicators are very mixed overall. The Cass Freight Index has declined for nine consecutive months through August, and has been "signaling an economic contraction" for the last three months, per Cass Information Systems. The report asserts that "we see a growing risk that GDP will go negative by year's end."