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Investing.com -- Jefferies made key adjustments to its sector strategy, upgrading Financials to Overweight while downgrading both Materials and Staples to Underweight.
The firm said the shift reflects expectations for a stronger economy, persistent higher interest rates, and broader earnings growth, which it believes will favor Financials while pressuring Materials and Staples.
"We’ve become more positive on the Banks," Jefferies stated, noting that they account for 55% of the Financials sector’s weight.
Several factors are said to support the upgrade, including "higher rates for longer," a strong track record of earnings beats, and a "better economy and M&A backdrop."
Jefferies adds that the sector is also "the second cheapest group in small caps," with particular preference given to Banks, Consumer Finance, and FinTech.
Conversely, Materials has been downgraded from Overweight to Underweight due to a challenging outlook.
"JEF analysts see weaker commodity prices in ’25, which will hurt the sector," the firm explained.
Additionally, Materials are exposed to the housing market, which faces "significant headwinds" from mortgage rates remaining above 7%. Jefferies also warned that "earnings growth in the 2nd half seems lofty in our opinion; we see estimate cuts ahead."
Staples also moves to Underweight, with Jefferies highlighting a less favorable environment for the sector in an improving economy.
"When the economy improves as shown by Leading Economic Indicators increasing on a YoY basis, the sector tends to trail."
Additionally, Jefferies’ Food analyst "sees headwinds for the Food industry in ’25," which represents 33% of the sector. Higher interest rates and a preference for small-cap outperformance in 2025 also pose challenges.
Beyond these changes, Jefferies maintains Overweight ratings on Health Care, Industrials, and Energy, while remaining Market Weight on Real Estate and Technology. Discretionary, Communication Services, and Utilities stay at Underweight.