Today’s article focuses on some key market sectors to keep an eye on in 2025, as a future-minded investor trying to unlock drivers of future value in stocks, but also understanding potential future downside risks in each sector too.
The 5 sectors I will discuss include REITs, banks, pharma, consumer staples, and airlines.
Before picking stocks for a diversified portfolio, it makes sense to understand what drives the sectors those stocks are in, as well as what factors to analyze more in depth, since no two sectors are necessarily the same. Within each of these sectors, I will name one of my stock picks I am bullish on this month in that sector, and briefly explain why.
REITs Making An Interesting Dividend Case
Real estate investment trusts (REITs) make an interesting case for dividend-income oriented investors who want to indirectly own real estate by owning shares in a REIT that owns a portfolio of real estate.
One of the benefits of REITs is its special tax treatment by the US IRS. According to a July 30th article from Investopedia, “to qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders.”
REITs typically specialize in a niche such as healthcare REITs that own medical buildings, residential REITS that might own apartment complexes, industrial REITs, or diversified REITs.
One niche that has some future growth drivers is the healthcare REIT, as macro data points to expected demand growth for senior care and assisted nursing facilities as well as outpatient care, so REITs that invest in such a portfolio could see future demand outgrow available supply. For example, last May it was reported by Yahoo! Finance that “the global skilled nursing facility market is estimated to grow from US$ 380.11 Billion in 2024 to USD 688.86 billion by 2031, and is expected to exhibit a CAGR of 8.9% over the forecast period 2024 to 2031.”
A future risk to consider in this sector is whether the REIT has a diversified property portfolio across a wider geography and multiple tenants, because overexposure to a single tenant may cause future downside risk if that one tenant ends up facing financial difficulties since this can impact future rental income for that REIT, thereby impacting future earnings.
A REIT I am bullish on this month is CareTrust REIT (NYSE:), which has been growing its portfolio and I think this can drive future rent income flows, but it also has a profit margin that beats several similar peers. In addition, this REIT pays a dividend yield of just above 4% as of today, with a proven steady dividend growth over the last several years. That could make a good case for dividend-income investors.
Regional Banks on the Rebound
Within the financials sector, I am focusing on banks especially.
What will drive future growth in this segment will be steady demand growth for loans, and I think that a lower interest rate environment might encourage such demand. Beyond loans, banks that can diversify and make fees-driven revenue from segments like wealth management and advisory can pose an interesting case for investors, and within this niche future upside can be driven by increased client money inflows to those wealth managers as that could drive future fees revenue, but also exposes such banks to greater revenue diversification and not overdependence on interest income alone.
One regional bank based in Ohio that I am bullish on this month is Northwest Bancshares Inc (NASDAQ:), whose forward dividend yield today tops 6%. From its FY24 Q3 results, according to the chart below, this bank has seen an increase in its net interest margin on a YoY basis, as well as an increase in its net interest income. Net interest margin, or the spread between interest revenue and interest expense a bank faces, is a common metric tracked in this sector.
In addition, this bank recently acquired Penns Woods Bancorp Inc (NASDAQ:), which I think could help drive business growth and exposure to more customers and revenue flows. According to a press release on Dec. 17th by Northwest Bancorp, “The combined company is expected to have pro forma total assets in excess of $17 billion and is expected to be one of the nation’s top 100 largest banks.”
A future risk factor to consider in this space would be increasing trends in net chargeoffs on bad loans, so those regional banks who have very small exposure to net chargeoffs could make a more attractive investment case, as well as those who don’t have overexposure to office loans but whose loan portfolio is well diversified.
Big Pharma Could Fill the Needs of an Aging Population
A sector known for its innovation pipeline is the big pharma sector, as it works to meet the existing demand for solutions and therapies in specific clinical areas.
As early as 2017, a research study published in the National Library of Medicine said the following:
“Projections estimate that the population over 75 years old will increase by as much as 78%, from approximately 19,000,000 to 34,000,000. These trends are expected to continue, with an 89% increase in the 85 years and older groups predicted by 2030. These combined factors each influence the total national burden of CVD (cardiovascular disease).”
I think that such macro-level data could drive future upside for those pharma brands that can fill the niche in the cardiovascular space, for one. A company that comes to mind is one I am bullish on, AstraZeneca (NASDAQ:).
Besides cardiology, this firm is also active in the oncology space, among other clinical areas. Besides a diverse existing portfolio of therapies already on the market and approved, it has a robust pipeline of new projects that could drive future growth but also provide valuable solutions for patients and caregivers.
Their CFO Aradhana Sarin said the following at the 2025 JP Morgan Healthcare Conference, as reported this month by Yahoo! Finance:
“AstraZeneca says a strong 2024 and stacked pipeline spells potential for further growth in 2025 as the company aims to bring in $80bn in revenue by 2030.
The company maintains a confident outlook for the new year.”
A risk factor to consider in this sector is that there are several large pharma brands trying to get regulatory approvals for their therapies, and some already dominate in market share. For example, the following chart from Statista shows 2023 data indicating that among the leading pharma companies for prescription sales and research/development spending, AstraZeneca is actually 8th place, while firms like Johnson & Johnson (NYSE:) are leading this peer group with $53B in prescription sales for this data period.
Consumer Staples Could See Upside From Strong Consumer Confidence
Consumer staples is also on my watchlist, as there are companies in this sector producing critical consumer essentials that are purchased everyday at major supermarket chains.
A macro-level factor I think could indicate future growth is consumer confidence. Recently this month, Deloitte published its financial well-being index which shows that as US headline inflation declined the financial well-being index increased, indicating a correlation between inflation and financial well-being, as seen in the chart below.
I think if this trend continues, 2025 could be an important year for consumer staples stocks which can see further upside due to a strong consumer.
One stock in this sector that I am bullish on this month is Church & Dwight (NYSE:), which is the parent company behind consumer brands such as Arm & Hammer baking soda and XTRA laundry detergent, among many others in its portfolio of products.
This company has steadily grown by acquiring brands, and also has a low debt/equity ratio of 0.52. In addition, some major financial firms have taking an interest in this stock as well.
For instance, a Jan. 6th article by editors at Investing.com said that financial firm Piper Sandler remained bullish on this stock, as their “analysis suggests that the company’s conservative management approach and the potential for strategic acquisitions offer additional upside potential.”
Because this sector makes consumer products that often people use in their households such as cleaning products, but also some products to be consumed, a future risk to consider is the potential for product recalls and lawsuits, which could drive future downside risk due to the legal costs and brand reputational costs involved.
Back in 2021, for example, it was reported by ABC 7 NYC that this company recalled its brand of gummy vitamins after reports of metallic mesh material were found.
Certain Airlines Could See Upside, But Also Stiff Competition in Sector
Airlines, which took a hit during the Covid pandemic and drop in air travel demand, seem to be continuing their comeback for 2025 as well.
Continued future upside will depend, in part, on continued air travel demand. There are macro-level forecasts pointing to continued growth in this space. For example, according to data site Statista, regarding the US flights market, “the revenue growth rate is estimated to be 2.47% annually, resulting in a market volume projection of US$161.10B by 2029.”
I think that could be a macro-level upside factor to consider, along with the consumer financial well-being index I mentioned earlier, since this sector is powered heavily by consumers spending on air travel, in addition to business travel.
An airline stock I am bullish on this month is Frontier Group Holdings Inc (NASDAQ:).
From its last quarterly results presentation, we can see that this airline is expanding to new routes and newer fuel-efficient aircraft like the Airbus A320neo. In terms of growing new routes, which could be considered an upside factor as it can drive future revenue, the company in their FY24 Q3 results “announced 33 new routes as part of the expanded winter schedule, including the return of Washington Dulles, Palm Springs, CA and Burlington (NYSE:), VT, and the addition of a new station in Vail/Eagle County, CO.”
The debt/equity ratio is modest at 0.85, compared to peers like Alaska Air (NYSE:) Group whose D/E is 1.04. A lower debt risk can be seen as an upside factor as it could attract more conservative investors to an airline stock like this, attracted to the lower debt risk and supporting the share price.
A future downside risk factor to consider is that the market share of this airline lags behind several larger airline brands in the US, according to the chart below from the US Bureau of Transportation Statistics, with firms like Delta Airlines (NYSE:) and American Airlines (NASDAQ:) taking the top 2 spots for US market share, in terms of domestic revenue passenger miles.
Conclusion: 2025 Will Be A Year For Unlocking Value And Minimizing Risk
In conclusion, today’s article picked 5 market sectors out of many to take a closer look at, with the goal of unlocking at least some future upside factors as well as some potential downside risks investors should consider about these sectors.
After investors survived the 2020 pandemic-year crash and subsequent recovery, the elevated inflation and high interest rate environment of the last few years, and a handful of regional bank failures such as SIlicon Valley Bank, my sentiment for 2025 will be that investors will be more inclined towards greater portfolio diversification and more in-depth analysis to reduce future downside risk, but also will be keen to unlock future upside factors in stocks that may often be underreported and under-publicized in mainstream financial media yet present a value case.
While there are many more sectors to consider, including energy, tech, and materials, to name a few, today’s article aimed to sample 5 sectors and some factors to consider when researching the stocks in them.
#Key #Market #Sectors #Watch
