Our latest Quarterly Sector Update reveals that technology stocks continue to appear best-positioned among the 10 sectors, while health care stocks (the market leader thus far in 2015) and consumer discretionary stocks may give tech a run for its money. Click through the slides or watch the video (see right) to find out why.
What is Fidelity’s Quarterly Sector Update?
The Quarterly Sector Update, including the Sector Scorecard, represents input from three discrete Fidelity investment teams—each with its own unique insights about sector investing—to present a comprehensive view of the relative performance potential among the 10 major equity market sectors over a range of investment horizons.
The Sector Scorecard’s proprietary methodology measures the relative attractiveness of each sector against five key factors: business cycle, fundamentals, relative valuations, momentum, and relative strength.
Scorecard: Positive signals for technology, health care
Information technology reflects positive signals on most metrics but appears neutral on six-month relative strength. Health care demonstrates generally positive signs, although the sector—the strongest performer year to date—appears expensive on relative valuation metrics. Consumer discretionary also performed well this year, and shows positive short-term signals.
Past performance is no guarantee of future results. Sectors are defined by the Global Industry Classification Standard (GICS®); see additional information in the Appendix. Factors are based on historical analysis and are not a qualitative assessment by any individual investment professional. Green portions suggest outperformance, red suggests underperformance, and unshaded portions indicate no clear pattern vs. the broader market, as represented by the S&P 500 Index. Quarter-end and year-to-date performance reflects performance of the S&P 500 Sector Indices. It is not possible to invest directly in an index. All indexes are unmanaged. Percentages may not sum to 100% due to rounding. Source: Fidelity Investments, FactSet, as of 3/31/2015.
Business cycle: U.S. economy remains solidly mid cycle
The U.S. economy remains in a mid-cycle expansion, which historically has supported the performance of the information technology and industrials sectors. However, the relative benefits of the current recent weak-oil/strong-dollar environment have been accruing more to domestic-centric early-cycle sectors, such as consumer discretionary.
Past performance is no guarantee of future results. LEFT: Indicates the current business cycle of the U.S. economy based on Fidelity's analysis of historical trends. This is a hypothetical illustration of a typical business cycle. There is not always a chronological progression in this order, and there have been cycles when the economy has skipped a phase or retraced an earlier one. See the latest Business Cycle Update for a complete discussion. Source: Fidelity Investments (AART), as of 3/31/2015. RIGHT: Unshaded portions indicate no clear pattern of out- or underperformance vs. the broader market, as represented by the top 3,000 U.S. stocks by market capitalization. Double +/– signs indicate that the sector has shown a consistent signal across all three metrics: full-phase average performance, median monthly difference, and cycle hit rate (see Glossary and Methodology slide for definitions). A single +/– sign indicates a less consistent signal. Source: The Business Cycle Approach to Equity Sector Investing, Fidelity Investments (AART), Sep. 2014.
Fundamentals: Technology and health care look strong
Information technology and health care have been the strongest sectors from a fundamental standpoint, particularly in terms of earnings growth and free-cash-flow margin over the past year. The weakest sectors on this trailing data include energy and telecom, as well as utilities on several measures.
EPS = earnings per share, the portion of a company’s profit allocated to each outstanding share of common stock. EBITDA = earnings before interest, taxes, depreciation, and amortization. The Financials sector is not represented in the EBITDA Growth or Free-Cash-Flow Margin charts. Please see Glossary and Methodology slide for further explanation. Source: FactSet, as of 3/31/2015.
Relative valuations: Financials, technology appear inexpensive
Financials, information technology, and telecom all appear relatively cheap based on valuation metrics. The energy sector, where earnings have been negatively affected by low oil prices, no longer appears cheap based on forward earnings expectations or free cash flow. Valuations are somewhat stretched for health care, a top performer for the past few years.
Forward earnings yield reflects analysts’ published earnings-per-share estimates for the next 12 months, divided by market price per share; it is the inverse of the price-to-earnings (P/E) ratio. Free-cash-flow yield reflects free cash flow divided by market price per share; it is the inverse of the price-to-free-cash-flow ratio. Please see Glossary and Methodology slide for further explanation. Source: FactSet, as of 3/31/2015.
Momentum: Health care, technology remain in the lead
Health care remained strong, while consumer discretionary replaced utilities in the momentum leadership. Utilities’ former relative strength reversed sharply during its Q1 retreat. Energy, pressured by low oil prices, remained the biggest laggard. Materials, a sector that is often affected by commodity prices, also was relatively weak.
Past performance is no guarantee of future results. Charts show performance of S&P 500 Sector Indices, indexed to 100, from 3/31/2013 to 3/31/2015. It is not possible to invest directly in an index. All indexes are unmanaged. Source: FactSet, as of 3/31/2015.
Relative strength: Consumer discretionary gains ground
Consumer discretionary has moved into the top spot in terms of relative strength, with health care, technology, and consumer staples remaining within the leadership group. Energy was once again the weakest sector, affected by a bleak earnings outlook amid continued low global oil prices.
Past performance is no guarantee of future results. Charts represent performance of specified S&P 500 Sector Indices relative to the broader S&P 500 Index. It is not possible to invest directly in an index. All indexes are unmanaged. Source: FactSet, as of 3/31/2015.
Innovation continues to support health care earnings
Health care sector earnings, up 18% over the past year, have benefited from many factors, including an aging global population and an expanding middle class in developing countries. Robust innovation, particularly in biotechnology, also has been a factor. The FDA has expedited approval for certain drugs, while the global pipeline of active projects has grown.
LEFT: Source: U.S. Food and Drug Administration (FDA), as of 12/31/2014. RIGHT: R&D = research and development. CAGR = compound annual growth rate. Source: Pharmaprojects, Citeline, Inc. as of 12/31/2014.
A positive backdrop for consumer discretionary
Consumer discretionary was the second-best-performing sector in Q1, lifted by strength in the retailing industry, among other groups. U.S. consumers have benefited from an improving job market and falling gas prices. A strong dollar typically boosts U.S. consumers’ purchasing power by making imported goods relatively cheaper.
Past performance is no guarantee of future results. LEFT: Source: FactSet, as of 3/31/2015. RIGHT: 12-month change as of 12/31/2014 (household net worth), 02/27/2015 (unemployment, new home sales), 03/31/2015 (consumer confidence, gas prices). Source: FactSet, U.S. Energy Information Administration.
Mobile, cloud-based trends transform technology sector
The shift to mobile and cloud-based applications has underpinned growth in the information technology sector. Global mobile data traffic is forecast to grow at a 57% annual rate through 2019, driven by expanding digital advertising led by strong mobile ad growth.
LEFT: E = estimate. CAGR = compound annual growth rate. Source: Cisco VNI Mobile Forecast 2015. RIGHT: Source: Magna Global, as of 2014.
Fed tightening cycles can affect sector leadership
The Federal Reserve has begun to move toward a rate-tightening posture, an environment that has implications for certain sectors, including utilities and telecom. Historically high-dividend-yielding sectors and industries typically underperform around the start of Fed tightening cycles, but begin to outperform as the economy moves closer to the late cycle. The data presented are average values.
Past performance is no guarantee of future results. High-dividend-yielders include the Utilities and Telecommunication Services sectors and the following industries: Real Estate Investment Trusts, Food & Staples Retailing, Household & Personal Products, and Commercial & Professional Services. Sectors and industry groups are weighted according to their market capitalization in the S&P 500 Index, and returns are expressed as non-annualized geometric averages. Source: Standard & Poor’s, Fidelity Investments (AART), as of 2/28/2015.