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Deep Dive: Wall Street’s favorite stock sector has potential upside of 43% as we enter the second half of 2022

At the midpoint of 2022, investors are looking at a remarkable change in stock valuations.

The S&P 500
SPX,
-2.01%

has declined 20%, but the benchmark index’s forward price-to-earnings valuation has fallen by 24% because future earnings estimates have continued to increase. In other words, the S&P 500 has gotten cheaper.

Analysts expect the stock market to roar back — especially three sectors.

Below are lists of favored stocks within those sectors, as well as the energy sector, which stands out with a decline in price-to-earnings (P/E) valuations despite rising 37% this year.

Here’s a summary of the 11 sectors of the S&P 500, with prices and median price targets among analysts polled by FactSet, weighted by market capitalization, as of the close on June 28:

S&P 500 sector

12-month upside potential based on weighted median price targets

Price change – 2022 through June 28

Forward P/E

Forward P/E – Dec. 31

Decline in forward P/E

Consumer Discretionary

43%

-32%

24.3

33.0

-26%

Communication Services

42%

-30%

15.4

20.9

-26%

Information Technology

37%

-26%

19.7

28.1

-30%

Financials

30%

-18%

11.4

14.7

-22%

Materials

29%

-17%

12.8

17.0

-25%

Industrials

28%

-17%

16.3

20.6

-21%

Real Estate

24%

-21%

18.3

24.2

-25%

Energy

24%

37%

8.7

11.0

-21%

Health Care

19%

-10%

16.0

17.2

-7%

Consumer Staples

15%

-7%

20.1

21.8

-8%

Utilities

14%

-3%

19.5

20.8

-6%

Full S&P 500

30%

-20%

16.4

21.5

-24%

Source: FactSet

Some notes about the sector data:

The three sectors for which analysts see the most upside are consumer discretionary, communication services and information technology. Of those three, only the tech sector has had forward P/E valuations contract more than the weighted price has dropped. (The forward P/E valuations are based on rolling 12-month earnings-per-share estimates.)

The energy sector is the only one that is up so far in 2022. But the rise in oil prices has driven such a high increase in earnings estimates that the sector’s forward price-to-earnings valuation has declined 21%.

If you are convinced that a particular sector or group of sectors is likely to perform well, one easy way to ride along is with an exchange traded fund designed to mirror its performance.

The SPDR series of ETFs, managed by State Street Global Advisors, are popular and designed to track the performance of each of the 11 sectors of the S&P 500. They include:

Consumer Discretionary Select Sector SPDR Fund
XLY,
-3.99%

— $14.6 billion in assets under management.

Communication Services Select SPDR Fund
XLC,
-2.91%

— $9.4 billion.

Technology Select SPDR Fund
XLK,
-3.00%

— $38.6 billion.

Energy Select SPDR Fund
XLE,
+2.70%

— $33.6 billion.

This isn’t to say that the SPDR sector funds are your only choice. Vanguard and iShares, for example, offer sector funds using different methodologies to track segments of broader indexes.

Analysts’ top stock picks

Here are analysts favorite stocks within the consumer discretionary, communications services and technology sectors, based on percentages of “buy” or equivalent ratings, followed by the energy sector, which has been added because of its decline in P/E valuation even as it has risen 37% this year.

Consumer discretionary

Here are analysts’ 10 favorite consumer discretionary stocks in the S&P 500, sorted by share of “buy” or equivalent ratings:

Company

Ticker

Share “buy” ratings

Closing price – June 28

Consensus price target

Implied 12-month upside potential

Caesars Entertainment Inc.

CZR,
-2.45%

94%

$42.97

$99.13

131%

Amazon.com Inc.

AMZN,
-5.14%

92%

$107.40

$175.49

63%

Bath & Body Works Inc.

BBWI,
-5.78%

90%

$29.00

$63.06

117%

TJX Cos. Inc.

TJX,
-3.90%

83%

$57.48

$75.32

31%

Hasbro Inc.

HAS,
-1.70%

81%

$84.19

$111.00

32%

Tapestry Inc.

TPR,
-1.01%

78%

$32.22

$45.46

41%

General Motors Co.

GM,
-1.85%

77%

$33.99

$57.64

70%

Penn National Gaming Inc.

PENN,
-1.64%

76%

$31.79

$55.58

75%

LKQ Corp.

LKQ,
-1.92%

75%

$49.94

$63.75

28%

Nike Inc. Class B

NKE,
-6.99%

74%

$102.78

$142.04

38%

Source: FactSet

Click on the tickers to begin your own research about any of the companies.

And you should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

Communications

Here are analysts’ 10 favorite stocks in the S&P 500 communications sector, by percentage of favorable ratings:

Company

Ticker

Share “buy” ratings

Closing price – June 28

Consensus price target

Implied 12-month upside potential

Alphabet Inc. Class A

GOOGL,
-3.30%

98%

$2,240.15

$3,190.74

42%

Match Group Inc.

MTCH,
-6.38%

91%

$71.81

$118.67

65%

T-Mobile US Inc.

TMUS,
-2.57%

91%

$133.03

$170.63

28%

Take-Two Interactive Software Inc.

TTWO,
-2.35%

81%

$126.18

$176.54

40%

News Corp. Class A

NWSA,
-1.59%

80%

$15.49

$28.04

81%

Electronic Arts Inc.

EA,
-2.17%

76%

$122.88

$153.21

25%

Meta Platforms Inc. Class A

META,
-5.20%

74%

$160.68

$283.54

76%

Walt Disney Co.

DIS,
-0.71%

73%

$95.92

$141.61

48%

Dish Network Corp. Class A

DISH,
-3.77%

68%

$18.13

$39.60

118%

Live Nation Entertainment Inc.

LYV,
-1.41%

65%

$84.38

$125.85

49%

Source: FactSet

Technology

The S&P 500 information technology sector ranked third on the list, above, with analysts seeing 37% upside potential, based on FactSet’s weighting of median price targets. Here are the analysts’ 10 favorite names in the sector, by percentage of “buy” or equivalent ratings:

Company

Ticker

Share “buy” ratings

Closing price – June 28

Consensus price target

Implied 12-month upside potential

Microsoft Corp.

MSFT,
-3.17%

95%

$256.48

$352.92

38%

ServiceNow Inc.

NOW,
-4.68%

94%

$473.44

$631.29

33%

EPAM Systems Inc.

EPAM,
-4.09%

93%

$311.51

$429.15

38%

Monolithic Power Systems Inc.

MPWR,
-4.74%

92%

$397.13

$567.56

43%

Intuit Inc.

INTU,
-4.55%

91%

$386.29

$515.00

33%

Salesforce Inc.

CRM,
-5.43%

90%

$171.46

$243.89

42%

Mastercard Inc. Class A

MA,
-3.21%

89%

$318.29

$430.19

35%

Visa Inc. Class A

V,
-2.67%

89%

$198.12

$265.75

34%

Micron Technology Inc.

MU,
-1.57%

89%

$57.86

$96.74

67%

Broadcom Inc.

AVGO,
-1.44%

88%

$498.45

$697.52

40%

Source: FactSet

Energy

Even though this sector has soared this year, with a 37% gain, its forward P/E has declined by 30%. Here are analysts’ 10 favorites energy stock in the S&P 500, by percentage of favorable ratings:

Company

Ticker

Share “buy” ratings

Closing price – June 28

Consensus price target

Implied 12-month upside potential

Diamondback Energy Inc.

FANG,
+4.35%

88%

$129.80

$183.20

41%

Schlumberger NV

SLB,
+3.01%

87%

$36.97

$50.40

36%

ConocoPhillips

COOP,
-1.04%

81%

$95.22

$131.21

38%

Phillips 66

PSX,
+1.89%

79%

$88.85

$116.06

31%

Marathon Petroleum Corp.

MPC,
+0.85%

78%

$88.69

$117.25

32%

Halliburton Co.

HAL,
+2.98%

75%

$33.19

$46.42

40%

Valero Energy Corp.

VLO,
+3.57%

75%

$116.25

$139.31

20%

Pioneer Natural Resources Co.

PXD,
+2.24%

73%

$235.33

$309.77

32%

Baker Hughes Co. Class A

BKR,
+2.14%

71%

$30.07

$40.99

36%

Williams Cos. Inc.

WMB,
+3.76%

71%

$31.74

$38.14

20%

Source: FactSet

More midyear coverage:

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