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Q3 sector scorecard: Tech tops the list

Tech scores highest. Consumer discretionary, health care stocks also positive.

  • Fidelity Asset Management
  • – 07/20/2015
  • Brokerage

Our latest Quarterly Sector Update reveals that technology stocks remain best-positioned among the 10 sectors. Health care stocks and consumer discretionary stocks also continue to exhibit strength. 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 unique insights about sector investing—to present a comprehensive view of the performance potential of the 10 major equity market sectors.

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: Tech, health care, consumer discretionary positive

Technology now looks attractive on all five metrics, boasting positive short-term relative strength following Q2. Health care and consumer discretionary have similar setups: Both sectors are demonstrating generally positive signals and are the top two performers year to date, but appear somewhat expensive on relative valuations.

QSU_Q3_2015_scorecard_scorecard

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 portions suggest underperformance, and unshaded portions indicate no clear pattern vs. the broader market, as represented by the S&P 500. Quarterly and year-to-date performance reflect performance of S&P 500 Sector Indices. It is not possible to invest directly in an index. All indices are unmanaged. Percentages may not sum to 100% due to rounding. Source: FactSet, Fidelity Investments, as of 6/30/15.

Business cycle outlook for U.S. consumer sectors

The U.S. remains in a solid mid-cycle expansion, which often results in the relative outperformance of cyclicals such as Technology and Industrials. The bright consumer outlook may boost discretionary spending that is typically stronger during the early cycle. Although not imminent, a late-cycle shift tends to favor sectors with more stable demand, such as Staples.

QSU_Q3_2015_scorecard_business_cycle

Past performance is no guarantee of future results. LEFT: 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 the 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. RIGHT: Discretionary personal consumption expenditure includes durable goods, clothing, and energy. Staples personal consumption expenditure includes nondurable goods ex. clothing and energy. Source: Bureau of Economic Analysis, Haver Analytics, Fidelity Investments (AART), as of 6/25/15.

Fundamentals: Technology and health care remain strong

The technology and health care sectors continue to shine from a fundamental standpoint, particularly in terms of earnings growth and free-cash-flow margin over the past year. The weakest sector on this trailing data is energy, driven lower by cheap prices and reduced oil-service spending.

QSU_Q3_2015_scorecard_fundamentals

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 the Glossary and Methodology slide for further explanation. Source: FactSet, Fidelity Investments, as of 6/30/15.

Relative valuations: Technology, financials, telecom appear inexpensive

Technology, financials, and telecom all appear relatively cheap, while valuations are modestly stretched for recent top performers consumer discretionary and health care. Energy also looks expensive on forward earnings expectations and free-cash-flow yield, but assuming book values remain stable, the sector appears undervalued on a price-to-book basis.

QSU_Q3_2015_scorecard_relative_valuations

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 the Glossary and Methodology slide for further explanation. Source: FactSet, Fidelity Investments, as of 6/30/15.

Momentum: Health care, consumer discretionary lead

Momentum leadership remained consistent, with health care, consumer discretionary, and technology holding on to their top rankings. Restrained by cheap oil, energy remained the biggest laggard. Telecom’s weakness persisted, and utilities stocks also continued their retreat, now trailing on a 12-month basis.

QSU_Q3_2015_scorecard_momentum

Past performance is no guarantee of future results. Charts show performance of S&P 500 Sector Indices, indexed to 100, from 6/30/13 to 6/30/15. Momentum is illustrated by comparing the performance of sectors to each other. It is not possible to invest directly in an index. All indices are unmanaged. Source: FactSet, Fidelity Investments, as of 6/30/15.

Relative strength: Health care, consumer discretionary reign

Health care has moved into the top spot, with consumer discretionary, and technology remaining within the narrow leadership group of sectors displaying relative strength. Tech’s one-month reversal amid an uptrend may pose a buying opportunity. Utilities and energy showed the greatest weakness, weighed down by disappointing performance year to date.

QSU_Q3_2015_scorecard_relative_strength

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 indices are unmanaged. Source: FactSet, Fidelity Investments, as of 6/30/15.

Fed cycles affect sector leadership

The onset of Fed tightening has traditionally been a signal that the beginning portion of the mid-cycle phase is ending, with some shifts in sector leadership. While tech has historically continued to perform relatively well during tightening cycles, the relative performance of the telecom and utilities sectors tends to improve once Fed rate hikes commence.

QSU_Q3_2015_scorecard_fed_cycles

Most-recent Fed tightening occurred in 2010. Past performance is no guarantee of future results. Equity universe is defined as the top 3,000 U.S. stocks by market capitalization; sectors as defined by the Global Industry Classification Standard (GICS). Source: Fidelity Investments proprietary analysis of historical asset class performance. Asset class total returns represented by indices from Haver Analytics, Fidelity Investments, as of 12/31/14.

Tech evolution: A more balanced sector

Despite the common perception that technology stocks are predominantly emerging, growth-oriented, and highly volatile, the sector composition is changing. Both early-stage growth companies and mature, high-free-cash-flow-yielding stocks now compose the sector. Volatility has fallen, dividend yields have risen, and many balance sheets retain ample cash.

QSU_Q3_2015_scorecard_tech_evolution

LEFT: S&P 500 Sector Indices. Source: FactSet, Fidelity Investments, as of 6/30/15. RIGHT: Relative standard deviation = standard deviation of the S&P 500 Technology Sector Index divided by the standard deviation of the S&P 500 Index. Source: FactSet, Fidelity Investments, as of 6/30/15.

Sectors can be an effective tool for managing equity risk

Sector volatility tends to be driven by macro forces. As a result, sectors that have less economic sensitivity tend to have more stable fundamentals and returns as well as fewer bear markets. Sectors that stand out for their relative stability include consumer staples, utilities, and health care.

QSU_Q3_2015_scorecard_sectors_effective

For more information, see Leadership Series article “Applications for Sectors: Managing Risk” (Jul. 2015). LEFT: Standard deviations of 12-month year-over-year returns and growth rates from 1/31/1962 through 1/31/2015. Equity universe is defined as the top 3,000 U.S. stocks by market capitalization; sectors as defined by the Global Industry Classification Standard (GICS). Source: Haver Analytics, Fidelity Investments, as of 1/31/15. RIGHT: Bear market is defined as at least a 20% correction. Source: Haver Analytics, Fidelity Investments, as of 1/31/15.

Consumer staples has attractive characteristics

Due to the consistent demand for the goods produced and sold by companies within the sector, consumer staples exposure can often provide ballast to a broader portfolio, specifically during bouts of higher volatility. Consumer staples stocks also boast healthy dividend yields and strong dividend growth, making them attractive to investors seeking income.

QSU_Q3_2015_scorecard_consumer_staples

Learn more

Dividend yield and dividend growth data for 10-Year Treasury Bonds reflect yield-to-maturity and interest payment growth, respectively. Dividend growth and worst 3-year annualized investment return data are shown as annualized growth rates. Sectors are defined by the Global Industry Classification Standard (GICS®) and are based on the S&P 500 Sector Indices. Past performance is no guarantee of future results. You cannot invest directly in an index. Source: FactSet, Haver Analytics, Fidelity Investments, as of 6/30/15.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
References to specific investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
This piece may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
All indices are unmanaged. You cannot invest directly in an index.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.
Market Indices
The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of Standard & Poor’s Financial Services LLC. Sectors and industries are defined by the Global Industry Classification Standard (GICS).
The S&P 500 Sector Indices include the standard GICS sectors that make up the S&P 500 Index. The market capitalization of all S&P 500 Sector Indices together composes the market capitalization of the parent S&P 500 Index; each member of the S&P 500 Index is assigned to one (and only one) sector.
Sectors are defined as follows: Consumer discretionary: companies that provide goods and services that people want but don’t necessarily need, such as televisions, cars, and sporting goods; these businesses tend to be the most sensitive to economic cycles. Consumer staples: companies that provide goods and services that people use on a daily basis, like food, household products, and personal-care products; these businesses tend to be less sensitive to economic cycles. Energy: companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, or other energy-related services and equipment, including seismic data collection; or the exploration, production, marketing, refining, and/or transportation of oil and gas products, coal, and consumable fuels. Financials: companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investments, and real estate, including REITs. Health care: companies in two main industry groups: health care equipment suppliers and manufacturers, and providers of health care services; and companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products. Industrials: companies whose businesses manufacture and distribute capital goods, provide commercial services and supplies, or provide transportation services. Technology: companies in technology software and services and technology hardware and equipment. Materials: companies that are engaged in a wide range of commodity-related manufacturing. Telecommunication services: companies that provide communications services primarily through fixed-line, cellular, wireless, high bandwidth, and/or fiber-optic cable networks. Utilities: companies considered to be electric, gas, or water utilities, or companies that operate as independent producers and/or distributors of power.
Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.

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