Welcome to Fidelity’s new Quarterly Sector Update, a collaboration of three investment teams, designed to give you a high-level snapshot of the relative performance potential of all 10 stock market sectors.
Each quarter, Fidelity SelectCo, Fidelity Management & Research Company Equity Division, and the Asset Allocation Research Team will assess a range of factors, including relative strength, momentum, relative valuations, fundamentals, and the business cycle to determine the best opportunities in the market.
Those that appear to be best positioned in this report: Technology, industrials, and health care.
Scorecard: Technology, industrials, health care see support
Reversing trend, utilities led the way in Q1 and consumer discretionary lagged. Innovation is supporting health care and technology, while a positive outlook for corporate spending supports industrials and technology. Commodity and emerging-market-sensitive sectors such as consumer staples, energy, and materials have faced technical and fundamental pressures.
Past performance is no guarantee of future results. Sectors as defined by GICS. See additional index information in the Appendix. Factors are based on historical analysis and are not a qualitative assessment by any individual investment professional. Green portions suggest historical pattern of outperformance, red portions suggest underperformance, and unshaded portions indicate no clear pattern vs. the broader market, as represented by the S&P 500 Index. Quarterly and YTD performance reflects performance of the 10 S&P 500 sector indices. It is not possible to invest directly in an index. All indices are unmanaged. Source: Fidelity Investments, as of 3/31/2014.
Relative strength: Trends hold, but reversal risk seen
Health care, industrials, and technology sustained their multiyear upward patterns into Q1, but charts turned midway through the quarter. Similarly, an upturn in relative strength in consumer staples, energy, and telecommunication services may signal a potential change in sector leadership.
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, as of 3/31/14.
Momentum: Consumer discretionary weakens, staples gain
After nearly five years of outperformance, Consumer discretionary weakened in Q1. Health care and industrials continued their multiyear up trends into the quarter, but paused in March. Among the laggards, the upward movement this quarter for consumer staples and utilities may signal a potential change in leadership.
Momentum: Like relative strength, price momentum is a near-term indicator of performance patterns. However, price momentum also can be used to evaluate performance for a sector separately from the broader market.
Past performance is no guarantee of future results. Charts show performance of S&P 500 sector indices, indexed to 100, from 3/30/2012 to 3/31/2014. It is not possible to invest directly in an index. All indices are unmanaged. Source: FactSet, as of 3/31/14.
Relative valuations: Earnings yield favors financials, tech, telecom
At quarter end, the market was trading near historical valuation levels based on forward earnings, and at a premium to historical levels on other metrics. At the sector level, multiple relative valuation metrics for financials, telecom and technology appeared attractive on a historical basis, driven by high relative forward earnings yields.
Relative Valuations: On their own, valuations are not necessarily the best indicator for sector performance, but when combined with other factors, valuations could be a useful tool in determining the risk-and-reward profile.
Source: FactSet, as of 3/31/14. Earnings Yield and Free Cash Flow Yield are the inverse of Price to Earnings (P/E) and Price to Free Cash Flow (P/FCF).
Fundamentals: Strong for health care, staples, technology
Health care, consumer staples, and technology have seen solid earnings growth and free-cash-flow margins with improving returns on equity. Conversely, energy, materials, and utilities all have experienced below-average growth and weak margins, driven by weaker volumes and pricing.
Fundamentals: Strong and improving fundamentals historically have been an intermediate-term indicator of sector performance. Fundamental analysis gives a view into how each sector is doing in terms of growth and profitability.
Financials sector is not represented in the EBITDA Growth and Free Cash Flow Margin charts; please see Glossary and Methodology slide for further explanation. Source: FactSet, as of 3/31/14.
Business cycle: Pattern favors industrials, technology
The underlying trend of the U.S. economy remains a slow, mid-cycle expansion despite some drag on Q1 economic activity from unusually cold and persistent winter weather. The technology and industrial sectors have exhibited patterns of outperformance in previous mid-cycle expansions.
Business Cycle: Understanding where we are in the business cycle may help determine which sectors are poised to outperform and underperform.
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. Please see the latest Business Cycle Update for a complete discussion. Source: Fidelity Investments (AART), as of 3/31/14.
Mid-cycle expansion positive for industrials
Industrials have benefited from expectations of increased corporate capital spending and a rebound in nonresidential construction, primarily in private retail. Machinery, engineering and construction, and transportation companies are some of the subsectors best positioned to benefit from these trends.
LEFT: Chart overlays U.S. CEO outlook on capital spending (net percentage of respondents to the Business Roundtable’s CEO Economic Outlook Survey that anticipated an increase in capital spending) with U.S. private businesses’ change in investment in fixed assets, which include structures, equipment, and software. Source: Haver Analytics, as of 3/31/14.
RIGHT: Chart overlays percentage of U.S. lenders reporting tighter standards and terms for commercial and industrial (C&I) loans with the change in private retail construction. Gray bars represent recessions as defined by the National Bureau of Economic Research. Private Retail Construction includes automotive, food/beverage, multi-retail, other commercial, warehouse, and farm structures. Source: Federal Reserve, Fidelity Investments (AART) calculation, as of 3/31/14.