Market Insights

The S&P 500 continues to hit new highs, but a strange mix of stocks is leading the advance.

Pharmaceuticals, medical devices, insurers and food companies were some of the top performers yesterday. While many of these sectors may not interest retail investors, they could become new leadership groups that are worth knowing.

Before breaking down the individual cases, it’s important to note changes happening beneath the surface in the market. On Monday, for instance, 341 members of the S&P 500 were above their 50-day moving averages. It was the most since early June, and was largely driven by health care and financials.

The meaning? Intermediate-term momentum is turning bullish on these two sectors at the same time growth stocks are lagging. This may reflect investor rotation, or longer-lasting changes in buy-side sentiment. It’s also noteworthy that recent earnings reports showed strong fundamentals in both corners of the market.

Pharmaceutical Stocks

Some of Tuesday’s new 52-week highs included Pfizer (PFE), Johnson & Johnson (JNJ) Gilead Sciences (GILD), Regeneron (REGN), AbbVie (ABBV) and West Pharmaceuticals (WST). All four of those companies reported better-than-expected profit and revenue last quarter. ABBV, JNJ and PFE raised their guidance. PFE credited strong demand for its Covid-19 vaccine, while JNJ cited medical equipment sales.

Medical Device Stocks

Speaking of medical equipment, device companies are one of the groups with the most new highs. Intuitive Surgical (ISRG), Edwards Lifesciences (EW), ResMed (RMD) and Thermo Fischer Scientific (TMO). Related companies providing testing services, like Quest Diagnostics (DGX), also advanced. All of those companies also beat estimates on the top- and bottom lines last quarter.

Insurance Stocks

Insurance is perhaps the most boring sector in the market, but several members of this industry are also hitting new highs:

• Chubb (CB): The largest U.S. property & casualty provider reported strong results on July 27. It’s clawed to new all-time in the last week.
• Aon (AON): The insurance broker beat earnings and revenue estimates on July 30. It’s also gotten a boost after abandoning an effort to acquire Willis Towers Watson (WLTW) and announcing a share buyback.
• Marsh & McLennan (MMC): The insurance broker said on July 22 that its growth was the strongest in two decades.
• Assurant (AIZ): The cell-phone insurer reported consensus-beating numbers on August 3, and broke out to new highs last week.

Food Stocks

Food stocks like Kroger (KR), Costco (COST) and (HSY) have also been hitting new highs thanks to strong quarterly results. They’re benefiting from a combination of higher prices and strong traffic. The Federal government also raised food-stamp payments by 30 percent on Monday, an unexpected boost to the public’s purchasing power.

Similar companies like Walmart (WMT), Sysco (SYY), Tyson Foods (TSN) and Monster Beverage (MNST) also jumped recently on strong results but didn’t make new highs yesterday.

Will Laggards Play Catch Up?

The stocks mentioned in this article belong to the health-care (XLV), financial (XLF) and consumer-staple (XLP) sectors. All three of those groups have declined as a percentage of the total market over the past decade. (Technology, communications and consumer discretionaries have gained.)

This may create the potential for a more lasting shift into the lagging sectors. After all, the coronavirus pandemic accelerated growth in major technology stocks. But results from companies like Amazon.com (AMZN), Facebook (FB) and Netflix (NFLX) last quarter suggested they may have cannibalized future growth. If they’ve peaked, investors may already be shifting into some of the new areas cited above.

In conclusion, the market often passes through phases of leadership. The era of large-cap technology dominance (“FANG” stocks) began in late 2016 and has slowed recently. It’s still early but current price action suggests a completely new set of companies may lead in coming quarters. They may not be as exciting or innovative, but they seem to be gaining new ownership. Boring or not, investors may want to pay attention.