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Sector scorecard: rankings for Q2

See our quarterly view of the relative performance potential for all 10 stock market sectors.

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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.

sector_scorecard_table_new

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.

sector_strength_weakness

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.

sector_leaders_laggards

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.

sector_earnings_flow_yield

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.

sector_growth

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.

sector_bizcycle725V2

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.

sector_expansion

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.

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Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and 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.
This piece may contain assumptions that are “forward-looking statements,” which are based upon 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 than those described here.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security, sector, or investment strategy.
Fidelity does not provide legal or tax advice, and the information provided herein is general in nature and should not be considered legal or tax advice. Consult with an attorney or a tax professional regarding your specific legal or tax situation.
Past performance and dividend rates are historical and do not guarantee future results.
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
All indices are unmanaged, and performance of the indices includes reinvestment of dividends and interest income and, unless otherwise noted, is not illustrative of any particular investment. An investment cannot be made in any index.
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.
Stock markets, especially non-U.S. markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets.
Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments. Additionally, bonds and short-term investments entail greater inflation risk—or the risk that the return of an investment will not keep up with increases in the prices of goods and services—than stocks. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.
The securities of smaller, less well-known companies can be more volatile than those of larger companies.
Growth stocks can perform differently from the market as a whole and from other types of stocks, and can be more volatile than other types of stocks. Value stocks can perform differently from other types of stocks and can continue to be undervalued by the market for long periods of time.
Market IndicesThe 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 defined by Global Industry Classification Standards (GICS®).
The S&P 500 Sector Indices include the 10 standard GICS® sectors that make up the S&P 500. The market capitalizations of all 10 S&P 500 Sector Indices together compose the market capitalization of the parent S&P 500; all members of the S&P 500 are assigned to one (and only one) sector.
S&P 500 sectors are defined as follows: Consumer Discretionary—companies that tend to be the most sensitive to economic cycles. Consumer Staples—companies whose businesses are 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, and 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, manufacturers, and providers of health care services; and companies involved in 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. Information Technology—companies in technology software & services and technology hardware & 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 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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