With the third quarter of the 2024 earnings season underway, Wall Street is dealing with a changing stock market environment. The Federal Reserve has started its interest rate reduction cycle and market watchers are on the lookout for labor market and inflationary indicators to determine whether the Fed will be able to meet its goal of reducing interest rates by an additional 50 basis points by the end of this year.
Simultaneously, the shifting economic climate is also creating changes in the investment environment. High interest rates traditionally do not mean well for certain stock market sectors barring exceptional circumstances. Some sectors that don’t perform well in a high-rate environment include real estate, healthcare, and technology.
For two of these, this has been the case in the 2022 – 2024 Federal Reserve interest rate hiking cycle as well. Starting from real estate, the flagship S&P index’s real estate sector’s annualized three-year return is currently -2.66%. From its peak of 324.75 in December 2021, the index has lost 48.2 points or 14.8%. Similarly, the high-end healthcare and biotechnology sector does not fare well during high interest rates either. Since 2021’s close, the S&P’s pharmaceutical stock index is down by -0.84% while the S&P’s biotechnology index has lost a sizable 12.61%.
This brings us to our third stock market sector, a.k.a, technology. Technology, as you’re likely aware, has seen a lot of investor interest due to the surge in artificial intelligence. Looking at the performance of the S&P’s technology stock index, its performance also mirrors real estate and healthcare stocks before the frenzy around artificial intelligence started. Between 2021’s close and the market’s bottom in October 2022, the index had lost 33%. During the same time period, the real estate, pharmaceutical, and biotechnology stock indexes had lost 34.8%, 12.2%, and 30.5%, respectively. However, market optimism surrounding artificial intelligence has created a clear bifurcation in performance.
As an example, while real estate stocks have gained 29% since the October 2022 bottom and biotechnology stocks have added 25% in value, information technology stocks are up by a whopping 115%. This shows that tech stocks have delivered 4x the returns of both real estate and biotechnology. Driving this is artificial intelligence, with the shares of the world’s premier AI GPU designer up by 690% since OpenAI publicly released ChatGPT.
Looking at these shifts, the next question to ask is which stock market sectors might benefit from the evolving environment moving forward. On this front, investment bank UBS has some insights. In its Equity Compass Report issued in mid-October, the bank identifies key themes and trends for US and global stock markets. Within global and US stock market sectors, the bank has rated only one sector as ‘Most Attractive’. Unsurprisingly, this is the US technology sector which is currently experiencing a sustained surge of investor optimism courtesy of artificial intelligence.
The bank shares several data points to justify its optimism in the US technology sector, and more specifically, artificial intelligence companies. Citing data from the Hugging Face repository, a collection of software development tools, it reveals “an average 200% y/y rise for new AI models and model downloads combined so far in 2024.” UBS is also optimistic about the growing adoption of artificial intelligence in the US business world. AI adoption is key since big technology firms that have invested billions of dollars in AI need it to generate returns on their investment.
As per UBS, data from the Census Bureau’s Business Trends and Outlook (BTOS) survey released in September 2024 shows that AI adoption across the 1.2 million firms tracked was picking up the pace. “In the survey, 5.9% of companies reported using AI as of 3Q24, up from 3.7% in 3Q23,” outlined the bank in its report. Not only did 5.9% of the firms adopt AI, but the survey’s outlook for the next six months revealed that AI adoption across the surveyed population could rise by 2.8 percentage points to sit at 8.7%. Commenting on the implications of the higher adoption, UBS stated that “increasing future adoption will increase visibility on AI monetization, which is consistent with recent comments from leading cloud platforms.” The firms slated to benefit the most from this monetization are those ” with strong footprints in existing customer bases,” believes the bank.
These statements necessitate asking the question of which industries are slated to benefit the most from AI adoption. Fortunately for us, UBS also shares data for the industries currently leading the way with AI adoption and those that could grow adoption in the future. Right now, the information technology and personal services sectors are leading with AI adoption since as of September 2024, their respective adoption percentages were 19.1% and 14.7%. For the next six months, while the same industries are expected to lead the pack in overall AI adoption through their 23% and 19.8% percentages, others are expected to make higher percentage point gains. Two industries that stand out in the report are educational services and the finance and insurance industries.
As per the report, the former is expected to increase its AI adoption by 5.6 percentage points to 18.7% over the next six months from the current value of 13.1%. For the finance and insurance sector, it is expected to mark a 6.2 percentage point jump to 13.4% from the existing AI adoption of 7.2%. Of course, while AI is by far the most popular sector in the market right now, UBS also shares other attractive areas. It outlines that the market “also offers exposure to secular growth in longevity through various US medical device companies. Many US companies are also playing leading roles in the energy transition via electric vehicles, renewables, and energy efficiency.”
Our Methodology
To make our list of UBS stocks with improving quantitative indicators, we chose the firm’s top stocks that are seeing improvements in EPS growth, P/E ratio, and other indicators. Stocks within each sector were ranked by the number of hedge funds that had bought the shares during Q2 2024. The sectors themselves were ranked by the cumulative number of funds invested in the firms.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
MetLife, Inc. (MET): Balancing Premiums and Investment Income Amid Market Shifts
A closeup of a person reading through a document outlining the advantages of life insurance.
MetLife, Inc. (NYSE:MET) is one of the biggest insurance companies in the world. Along with insurance, the firm also offers pension benefits, retirement benefits, and other products. Premiums account for the biggest chunk of MetLife, Inc. (NYSE:MET)’s revenue. As of H1 2024, 64% of the firm’s revenue came from premiums, which makes it vulnerable to any constraints in its ability to raise premiums. Yet, unlike several other insurance companies, MetLife, Inc. (NYSE:MET) also generates a sizable portion of revenue from investment income. During H1 2024, 31% of the firm’s revenue came from investment income. Consequently, premiums and investment income form a key part of MetLife, Inc. (NYSE:MET)’s hypothesis. Investment income benefits from high interest rates, and the firm’s biggest profit earner is its Group Benefits business which provides vision, accident, and health insurance products to business employees. This dependence led to a 5.7% share price drop in October after MetLife, Inc. (NYSE:MET)’s Q3 results which saw Group Benefits earnings drop by 11% annually.
During the Q3 2024 earnings call, MetLife, Inc. (NYSE:MET)’s management commented on its Group Benefits business. Here is what they shared:
“Shifting to business segment results. Our Group Benefits business reported adjusted earnings of $431 million excluding notable items, down from a strong underwriting quarter a year ago. On a year-to-date basis also excluding notable items adjusted earnings are up 7%. Our scale and broad product range have long been points of competitive differentiation for our Group Benefits business, contributing to our adjusted premiums, fees and other revenue growth. In the quarter, adjusted PFOs, excluding the [Technical Difficulty] policies, rose 5.3%. For the year-to-date period, adjusted PFOs on the same basis similarly grew 5.5%. With employee benefits enrollment season again upon us, this year, more than 1 million U.S. employees will be able to make their enrollment experiences easier by using MetLife’s Upwise, a newly developed tool to help them choose and use their benefits.
Overall, MET ranks 2oth on our list of UBS’ top quant stocks in AI, IT, healthcare & other sectors. While we acknowledge the potential of MET as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MET but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
