U.S. equities offer a good risk/reward ratio at today’s current valuations, but investors should focus on value stocks and three market sectors: financials, utilities and energy, said Hennessy Funds during its Market Outlook press conference in New York on Wednesday.
With inflation continuing to drive the markets into 2024, and the Federal Reserve probably raising rates until at least June 2023, it will be at least another six months that value will beat growth, said Ryan Kelley, Hennessy’s chief investment officer and co-portfolio manager of 10 funds. “When the Fed starts cutting rates, then growth will come back. But for now stay defensive.”
Kelley said the markets will experience more volatility next year and the energy sector still has room to run. “We’re likely to see more downside next year,” he said. “But I don’t think we will retest the lows.”
Hennessy’s outlook for 2023 said equities offer a good risk/reward ratio at today’s current valuations, and that there is plenty of capacity for stock buybacks and dividends. It added that while earnings growth is slowing down, it will remain positive into the new year, with the top sectors being financials, utilities, and energy.
The firm said the forward price-to-earnings (P/E) ratios for both the Dow and the S&P are reasonable at 16.9 and a price-to-sales (P/S) ratio of 2.3. The firm predicts the Dow Jones Industrial Average will rise to between 38,000 and 40,000 within 18 months.
Hennessy, a family of 14 domestic and two international mutual funds, is run by Hennessy Advisors (HNNA), a Novato, Calif.-based firm with $3.2 billion under management. So far in 2022, the funds have posted an impressive performance by focusing on downside protection.
Eleven Hennessy funds are outperforming the S&P 500 Index’s 14.9% decline year to date, with nine funds beating their specific benchmarks. Most impressive amid the yearlong market downturn is that seven funds report positive total returns year to date.
The Hennessy Energy Transition Fund (HNRIX) is up 49.3% year to date, the Hennessy Midstream Fund (HMSIX) is up 32.2%, and the Hennessy Cornerstone Mid-Cap 30 Fund (HFMDX) is up 5.5%, according to Morningstar.
The Cornerstone Mid-Cap 30, which follows a strategy of value investing, earnings growth and momentum, is overweight in energy, health care and materials. Energy makes up 26% of the portfolio, with consumer discretionary coming in at 22% and industrials at 16%.