Quarterly Sector Update - Fidelity Investments
LEADERSHIP SERIES THIRD QUARTER 2018
Quarterly Sector Update
PRIMARY CONTRIBUTORS Fidelity Management & Research Company, Equity Division
SECTOR UPDATE
Scorecard: Technology and Discretionary Remain on Top
The S&P 500 has traded in a fairly narrow range through the first half of 2018, gaining 2.6%. Technology, consumer discretionary, and energy top the scorecard, and cyclicals are likely to remain in favor as the corporate profit recovery remains intact. Consumer discretionary had the strongest YTD returns and energy was Q2's top performer, driven by a sharp rise in oil prices. Conversely, real estate and utilities continue to face headwinds.
Sector Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Real Estate Telecom Utilities
Longer Business
Cycle
+ + ?
?
Time Horizon View
Fundamentals
Relative Valuations
+
?
+
?
+
?
+
?
+ ?
+ ?
Shorter Relative Strength
+ ? +
? +
?
Weight in S&P 500?
Index
12.9%
6.7% 6.3% 14.2% 13.9% 9.9%
26.0%
2.8% 2.7% 1.8% 2.8% S&P 500? Returns
Performance as of 6/30/18
Latest Quarter
Year to Date
Dividend Yield
8.2%
11.5%
1.2%
-1.5% 13.5% -3.2%
3.1% -3.2%
-8.5% 6.8% -4.1% 1.8% -4.7%
3.1% 2.6% 1.7% 1.6% 2.0%
7.1%
10.9%
1.1%
2.6% 6.1% -0.9% 3.7%
-3.1% 0.8% -8.4% 0.3%
2.0% 3.3% 5.2% 3.4%
3.4%
2.6%
1.8%
Past performance is no guarantee of future results. Sectors as 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; unshaded portions indicate no clear pattern vs. the broader market as represented by the S&P 500. Quarterly and year-to-date returns reflect performance of S&P 500 sector indexes. It is not possible to invest directly in an index. All indexes are unmanaged. Percentages may not total 100% due to rounding. Source: FactSet, Fidelity Investments, as of June 30, 2018.
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SECTOR UPDATE
Fundamentals: Tech, Materials, and Discretionary Still Strong
Cyclical sectors, led by technology, materials, and consumer discretionary continued to show fundamental strength through Q2. Technology boasted the highest EBITDA growth and FCF margin; materials had impressive EPS and EBITDA growth; and consumer discretionary's ROE has been strong. On the other hand, the fundamentals of financials and some defensive sectors, including real estate and utilities, were weaker relative to the broad market.
EPS Growth (Last 12 Months)
150% 100%
50% 0%
-50%
EBITDA Growth (Last 12 Months)
25% 20% 15% 10%
5% 0%
EEnneerrggyy TTeleeccoomm MMateriaallss
Utiliittiieess Cons.. Discc..
SS&&PP 550000 Cons.. SSttppllss..
Industtrriiaallss RReeaall EEssttaattee
Finaanncciiaallss TTechhnnoollooggyy HHeeaalltthh CCaarree Technology
Energy Materials S&P 500 Cons. Disc. Cons. Stpls.
Utilities Health Care
Telecom Industrials
Cons. Stpls. Cons. Disc. Technology
Industrials Health Care
Materials Telecom S&P 500
Utilities Financials Real Estate
Energy Technology
S&P 500 Telecom Health Care Materials Industrials Cons. Stpls. Cons. Disc.
Energy Utilities
Return on Equity (Last 12 Months)
30% 20% 10%
0%
Free-Cash-Flow Margin (Last 12 Months)
30% 20% 10%
0% -10%
Fundamentals: Strong and improving fundamentals historically have been an intermediate-term indicator of sector performance. Fundamental analysis gives
a view of how each sector is doing in terms of growth and profitability.
Past performance is no guarantee of future results. EPS = earnings per share. EBITDA = earnings before interest, taxes, depreciation, and amortization. The financials and real estate sectors are not represented in the EBITDA Growth or Free-Cash-Flow Margin charts. Note that the energy sector's EPS growth (last 12 months) was 661.6%. See the Glossary and Methodology slide for further explanation. Source: FactSet, 3 Fidelity Investments, as of June 30, 2018.
SECTOR UPDATE
Relative Valuations: Telecom and Energy Look Cheap
Based on our framework, telecom and energy appear inexpensive relative to their historical averages and to other sectors, as both sectors have trailed the broader market over the past few years, despite energy's more recent rally. Financials also looks attractive from a valuation perspective. Conversely, the valuations of technology, consumer discretionary, and industrials appear somewhat elevated.
Earnings Yield
10-Year Range (excl. top & bottom 5%) Current Historical Average
Relative Forward Earnings Yield to S&P 500 Index
200% 180% 160% 140% 120% 100%
80% 60% 40% 20%
0%
Free-Cash-Flow Yield
10-Year Range (excl. top & bottom 5%) Current Historical Average
Relative Free-Cash-Flow Yield to S&P 500 Index 300% 250% 200% 150% 100%
50% 0%
-50% -100%
Cons. Disc. Cons. Stpls.
Energy Financials Health Care Industrials Technology Materials Real Estate
Telecom Utilities
Cons. Disc. Cons. Stpls.
Energy Health Care
Industrials Technology
Materials Telecom
Utilities
Relative Valuations: On their own, valuations are not necessarily the best indicator of sector performance, but when combined with other factors, valuations can be a useful tool in determining the risk-and-reward profile.
Past performance is no guarantee of future results. 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. The financials and real estate sectors are not represented in the Free-Cash-Flow Yield chart. Please see the Glossary and Methodology slide for further explanation. Source: FactSet, Fidelity Investments, as 4 of June 30, 2018.
SECTOR UPDATE
Relative Strength: Tech and Discretionary Continued to Lead
Technology and consumer discretionary continued their steady leadership through the first half of 2018, while energy also outperformed. Defensive sectors such as consumer staples and telecom continued to trail the broader market, with no clear sign of an impending change in trend. Industrials also lagged over the past six months, but leading indicators suggest a constructive outlook for the sector moving forward.
Sectors Exhibiting Relative Strength
Technology
Cons.DDisiscc..
Energy
Price Relative to S&P 500 Index 140
130
120
110
100
90
80
70
60
50 Jun-16
Dec-16
Jun-17
6-month review
Dec-17
Jun-18
Sectors Exhibiting Relative Weakness
Cons. Stpls.
Telecom
Industrials
Price Relative to S&P 500 Index
140
130
120
110
100
90
80
70
60
50 Jun-16
Dec-16
Jun-17
6-month review
Dec-17
Jun-18
Relative Strength: This indicator compares the performance of each sector with the performance of the broad market, based on changes in the ratio of the securities' respective prices over time.
Past performance is no guarantee of future results. Charts represent performance of specified S&P 500 Sector Indexes relative to the broader S&P 500 Index. It is not possible to invest directly in an index. All indexes are unmanaged. Source: FactSet, Fidelity Investments, as of June 30, 2018.
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