Wall Street's leading stocks reveal investor caution

NEW YORK (Reuters) – Wall Street stocks have climbed to record highs as concerns over US-China trade relations and Federal Reserve's monetary policy have subsided, but cautious investors have held to technology stocks and some defensive stocks over value stocks and more speculative plays such as IPOs.

FILE PHOTO: A street sign on Wall St. is seen near the New York Stock Exchange (NYSE) in New York City, USA, September 17, 2019. REUTERS / Brendan McDermid

It is unlikely to change in short term even if equities continue to rise, strategists say, as uncertain financial conditions lead investors to equities in companies with solid revenues and growth prospects.

As concerns about a slowdown in global economic growth have escalated, technology stocks and defensive stocks in the real estate, utilities and consumer staple sectors have shifted into leading US stocks higher. Technology companies are considered capable of earnings growth even though the economy is in a recession, while defensive stocks offer steady dividends.

S&P 500. SPX has gained 22% this year largely due to the 36% gain in technology shares. SPPLRCT, which has a major impact on the benchmark index. The S&P 500 technology sector includes the two largest US market capitalization companies, Apple Inc ( AAPL.O ) and Microsoft Corp ( MSFT.O ).

Apple shares have risen 62% year to date, Microsoft 41%. In total, tech stocks make up about a third of benchmark earnings.

plots. SPPLRCR shares have risen 26%, the second largest percentage gain among S&P sectors, but they have little weight on the index.

However, shares from less basic sound companies have faltered. The Russell 2000 Small Cap Index, one-third of whose constituents have no net income, underperformed the S&P 500 in 2019. And shares in several companies that went public this year have fallen sharply since debuts, including Lyft Inc ( LYFT .O ), Uber Technologies Inc ( UBER.N ) and Slack Technologies Inc ( WORK.N ).

Unusual US companies holding IPOs this year have had a median return of 0%, according to a Reuters analysis.

Investors "don't just want to buy something unconditional," said David Joy, chief marketing strategist at Ameriprise in Boston. "We will see some revenue or some prospects for earnings."

Recently, the S&P 500 trading pattern has begun to shift. Defensive stocks underperformed in October when the US and China appeared on the border to sign a limited trade deal and the Federal Reserve cut interest rates for the third time this year. At the same time, value shares, so named because of their relatively low price-to-earnings ratio, have increased. Over the past two months, the Russell 1000 Value .RLV Index has outperformed the Russell 1000 Growth Index .RLG.

The improved performance of value shares, concentrated in economically sensitive sectors such as economics, has led to proposals for a leadership rotation among American equities. But while conditions may support an outbreak of such stocks, some investors say they are reluctant to make bold bets on financial data confirm a bounce back. On Friday, the Institute for Supply Management's U.S. manufacturing index showed factory activity for a third month in October.

"We don't suddenly return to value," said Mark Stoeckle, CEO of Adams Funds in Baltimore. "I'd rather have the data to tell me it's time to be valuable."

The S&P 500 Technology Index has in fact made new highs over the past week and throughout the year, while the S&P 500's economic .SPSY index remains at the peak of 2018.

"We are looking for signs that tech will roll over, "said Keith Lerner, chief marketing strategist at SunTrust Advisory Services in Atlanta. "At this point, it's too early to say it."

Reporting by April Joyner; Additional reporting by Noel Randewich in San Francisco; Editing by Alden Bentley and David Gregorio

Our Standards: The Thomson Reuters Trust Principles.

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