The U.S. consumer staples and healthcare sectors show the strongest potential for total return over the next year, according to a new research note from Global Insight.

Of the 10 sectors that comprise the U.S. equity market, Global Insight recommends that the consumer staples and healthcare sectors be given an overweight position. By contrast, it says, the energy, consumer discretionary, and utilities sectors have relatively poor fundamentals for investment.

The firm says the consumer staples sector currently has a sizeable overweight recommendation, helped in part by its “defensive” nature in a slowing economy. “The companies in this sector often show consistent earnings growth over the course of the business cycle since they sell relatively inelastic products and services. This feature is reflected in lower measures of volatility in stock prices and earnings growth rates than is typically seen in other sectors,” it notes.

An attractive sector valuation also boosts the relative prospects for total future return from consumer staples, it adds. “Despite seeing stock prices rise in line with those of the overall market, the dividend yield from this sector is still comparatively high. In addition, both the dividend yield and payout ratio are rising. Further, while a sector P/E for consumer staples of 19 is not particularly low when compared to other sectors, it is lower than its own history (consumer staples have a 10-year average P/E of 23),” it says. “The forward growth of profits from this sector is strong enough to lower the “PEG” ratio to an even more historically attractive range, and to raise the Free Cash Flow “turning point” indicator well above one. In addition, the improving fundamental indicators are also a large factor in determining an improving credit outlook for this sector.”

The healthcare sector also merits an overweight recommendation from both fundamental and risk perspectives, Global Insight says. “Perhaps the most attractive aspect of this sector is the robust prospect for future earnings growth due to faster sales and positive pricing power,” it says.

The firm notes that the industrials sector is also relatively undervalued, while its earnings trend remains intact. However, it says that the industrials are usually more economically sensitive than healthcare or staples. Also, “a worsening perspective for future credit quality tempers what would otherwise be a solid over-weight recommendation for the industrials sector,” it adds.

The relative view of the energy and consumer discretionary is “unambiguously negative”, it says. “The energy sector’s future prospects are in large part a victim of success of the recent past, having enjoyed by far the biggest run-up in stock market prices over the past few years, largely on the strength of steadily higher oil prices. However, while high oil prices are expected to remain in place for several years — supported by strong demand from China and other fast growing emerging markets — the prospects for further rise in prices are capped by an expected slowdown in the U.S. economy and price-induced attempts to lower demand.”

“The consumer discretionary sector is similarly sensitive to the impact of a slowing U.S. consumer market. The dividend yield for this sector is unattractive, and the prospects are further clouded by a negative reading in both the credit risk indicator and the technical momentum indicator,” it notes.