Sectors to Buy for Post-Brexit Safety

Investors should stick to a playbook of 'quality, income and protection,' one analyst says, because second-quarter earnings won't be stellar and volatility will likely return.
By Gregg Greenberg ,

Investors should stick to a playbook of "quality, income and protection" this summer because second-quarter earnings won't be stellar and volatility will likely return, said Nadia Lovell, U.S. equity strategist at J.P. Morgan Private Bank.

"The Brexit changed the game in terms of increased market volatility as we head deeper into the summer," said Lovell, adding that her year-end S&P 500 price target is 2025, or 3.5% lower than the current level of 2093.

Second-quarter earnings season kicks off in earnest next week, with Wall Street expecting corporate profits to be down 4.4% year over year. Lovell said investors should expect the best growth in the consumer discretionary and health care sectors, despite the fact that they both have lagged the overall market thus far in 2016.

She said the outlook for second-half 2016 earnings should improve due to the increased stability in the U.S. dollar and the rebound in oil prices. As for 2017, Lovell expects 5% to 6% earnings-per-share growth, well below market consensus of 13.5%, but "enough" to push the market higher a year from now.

As for oil, Lovell said her focus continues to be on a select group of the highest quality low-cost North American oil producers. They should see an inflection in fundamentals in the second half of 2016 and into 2017, she said.

"We would become more opportunistic on the broad energy complex on a more considerable pullback," said Lovell. "We continue to recommend avoiding natural gas-exposed names and offshore drillers."

As for sectors to avoid in the back half of 2016, Lovell said investors may want to lighten up on the market's current leaders.

"Utilities and telecoms have significantly outperformed the market this year, and we think that trade will start to unwind as we go into the second half of the year," said Lovell.

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