Q1 2021 sector scorecard

Energy and financials led in the last quarter of 2020, followed by industrials.

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Cyclical sectors, those businesses and industries that thrive in a growing economy, perked up in the fourth quarter last year. Energy bounced back from the struggles in early 2020 while technology and consumer discretionary also continued to deliver strong performance.

View the interactive chart presentation.

Looking ahead, Fidelity's sector strategist, Denise Chisholm, sees signs that stocks may continue to rise despite volatility. Among the corners of the market she’s watching for opportunities: small caps, financials, tech, consumer discretionary, and energy service companies. Meanwhile, consumer staples may not be the bargain they seem to be, as earnings in the sector may lag other areas of the market as the economy recovers.

Some of the other findings from Chisholm include:

  • Technology led in terms of fundamentals and relative strength in the second half of 2020. Relative strength shows performance compared to the rest of the stock market.
  • Financials showed the cheapest valuations at the end of 2020. Energy and health care stocks were also inexpensive based on price-to-earnings and price-to-book ratios.
  • Credit spreads narrowed in the fourth quarter of 2020. The term "credit spreads" refers to the difference in yields on one type of bond compared to another of similar maturity. Historically, tightening credit spreads have been a good setup for stocks—especially when spreads began low and kept falling, as may be likely if the vaccine helps boost the economic recovery.
  • Volatility may sometimes be a good sign for stocks. Historically, extreme market volatility tends to be followed by above-average stock market returns.
  • Small-cap stocks may be primed for outperformance. Chisholm cites an alignment between weak earnings growth and weakest-quartile free cash flow and book yields as possible evidence. In the past when those factors lined up, the odds of outperformance increased.
  • The energy sector has cut capital spending recently which helped boost the rebound last year. Within the sector, services companies have cut spending the most which has increased their attractiveness compared to other energy companies.
  • Energy services stock prices haven't gone much higher yet. The industry's free cash flow yield recently rose to levels not seen since the 1980s. The combination of cheap valuation with high free cash flow yields has led to outperformance 74% of the time in the past.
 

Get deeper insights in our interactive chart presentation. Find out how the 11 sectors performed in 2020 and what to look for in the first quarter of 2021. Please note that if you are viewing the presentation on a phone or tablet, it will only work in landscape view.

Next steps to consider

Get industry-leading investment analysis.

View the Quarterly Sector Update chart presentation.

She uses history to share probability analysis on the US equity sectors.

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