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Schwab Sector Insights: A View on 11 Equity Sectors

Schwab Sector Insights: A View on 11 Equity Sectors

“Schwab Sector Insights: A View on 11 Equity Sectors” provides detail on our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is published on a monthly basis, and is designed for investors looking for tactical ideas. For more information on our current views, read the latest Schwab Sector Views.

Sector Overview

sector table

Source: Schwab Center for Financial Research, as of 03/12/2021. See "Important disclosures" for an explanation of the Macro, Value, Fundamental and Relative Strength factors. The relative performance of the “Outperform” and “Underperform” Schwab Sector Views is total return of the respective sectors relative to the total return of S&P 500 index since the announced inception date of our view through 03/12/2021. A positive (negative) total return reflects outperformance (underperformance) of the sector relative to the overall S&P 500 Index. Past performance is no guarantee of future results.


Communication Services: Marketperform


The Communication Services sector includes telecommunication services providers, media (e.g., television, radio, print publications, advertising), entertainment (e.g., movie production, sports teams, streamed content), and interactive media (e.g., social networking websites, video games).

Pandemic-related stay-at-home behaviors have been good for some of the companies in the sector, as it has led to increased use of social media and demand for streaming entertainment—though the pace of enrollments is likely to ebb as traditional entertainment options reopen. With the shift from traditional TV and cable, advertisers have struggled but are quickly pivoting toward online mediums. Wireless service revenues and equipment sales are being supported by the initial rollout of fifth generation (5G) cellular technology. While the larger social media companies (Alphabet/Google and Facebook) enjoy significant competitive advantages due to their dominance in their respective business lines—search engine and social media—they also face emerging antitrust risks, as well as potential market saturation.

Longer term, we believe the continued expansion of 5G could further increase growth within the sector, as it continues to increase demand for equipment and services. Upgrading networks will require substantial capital investment, but federal government infrastructure initiatives could result in subsidies and investment.

Positives for the sector:

  • The competitive advantage for social media
  • 5G rollout should boost growth potential 
  • Government infrastructure investment to ease 5G capital expenditure burden 
  • Strong streaming entertainment enrollments, but the pace has likely peaked

Negatives for the sector:

  • The antitrust regulatory trend is negative for the search engine and social media companies
  • There is the potential for increased social media regulation (for example, Section 230 legal shield is under scrutiny)
  • Streaming services risk market saturation

Risks for the sector:

  • Sector market capitalization is heavily concentrated in the top two stocks—Facebook and Google—whose movement can significantly influence the sector


Consumer Discretionary: Marketperform



The Consumer Discretionary sector includes internet retailers, automobiles and parts, household durable goods (e.g., refrigerators, washers/dryers), consumer durable goods (e.g., televisions, home audio equipment), leisure products (e.g., sports equipment, bicycles, toys), apparel, luxury goods, footwear, casinos, hotels, fitness centers, restaurants and bars.

The Consumer Discretionary sector—which is typically sensitive to swings in the economy—had its winners and losers with the onset of the COVID-19 pandemic. The massive stimulus efforts and stay-at-home orders spurred a surge in spending on home improvement and e-commerce sales early in the crisis—and the related stocks led the equity market rally. Now, with vaccine distribution expected to be substantially completed by the end of May, even the most beaten-up stocks in the sector—like those in the apparel and hotel industries—have recovered and in many cases extended well beyond pre-crisis price levels. The cruise industry is the exception. But these industries are often overshadowed by bigger companies in the sector—like Amazon and Tesla—that constitute nearly 45% of the sector’s market cap. The longer-term trend toward e-commerce and electric vehicles is likely to continue to support the fundamentals of these growth industries, but investor enthusiasm may have pushed valuations too high. Although higher interest rates are in part reflecting stronger economic expectations, they can weigh on investors’ perceived value of future earnings.

Positives for the sector:

  • Vaccine distribution and ongoing economic recovery are positive for many of the more traditional discretionary industries
  • The shift away from brick-and-mortar is likely to continue to support the fundamentals for online retailers
  • Pro-cyclical macroeconomic tailwinds in recovery stage of business cycle

Negatives for the sector:

  • The sector is overly concentrated in internet retail and automobiles
  • Valuations and investor enthusiasm appear stretched; higher interest rates can weigh on both
  • Semiconductor shortages weighing on auto production

Risks for the sector:

  • Antitrust action is possible for the largest online retailer.


Consumer Staples: Underperform


The Consumer Staples sector includes food, beverage and tobacco products; and food distributors (e.g., supermarkets, hypermarkets); non-durable household goods (e.g., detergent and diapers) and personal products (e.g., shampoo and cosmetics).

The ongoing recovery in the economy and shift toward cyclical sectors has resulted in underperformance of the sector since the market low in March 2020—as would be expected for a defensive sector whose constituents are less affected by changes in the business cycle. However, with the prospects of reduced social distancing and full reopening of restaurants, food wholesalers that service restaurants have regained some footing, but at the expense of some big-box stores. In general, retailers within the sector have aggressively cut costs, leaving them in reasonable financial condition. But limited pricing power in a low-interest-rate environment gives them less–than-exciting top-line growth potential.

With additional fiscal stimulus, rollout of the vaccines, and accommodative monetary policies, we think the economic recovery has a better chance of maintaining traction. At this stage of the business cycle, the consumer staples sector typically underperforms the overall market. We think growing confidence in the economy will continue to weigh on relative performance going forward—though perhaps overly exuberance in the markets could spark volatility that would favor the defensive sector.

 Positives for the sector:

  • It typically has a stable earnings profile
  • Companies have engaged in aggressive cost-cutting

Negatives for the sector:

  • An improving economy and strong stock market historically typically make this defensive sector relatively less attractive to investors
  • Companies tend to have limited pricing power in a low-inflation environment

Risks for the sector:

  • The additional government stimulus and successful distribution of the COVID-19 vaccines could further support the economy and reduce stay-at-home food and staples demand

Energy: Marketperform



The Energy sector includes oil and gas drilling, equipment, exploration, refining, marketing, storage and transportation; and coal mining and production.

The price of oil has risen above what it was entering the COVID-19 crisis and is now greater than the price that is generally profitable for many oil companies, despite still-low demand. The oil rig count has been slow to rise amid slashed capital expenditures by oil companies, and inventories have declined, supporting oil prices. The energy sector continues to face heightened uncertainty due to the supply/demand imbalance perpetuated by COVID-19-related economic shutdowns, and OPEC agreements is planning to gradually increase production now that the price of oil has risen sharply. This paints a challenging fundamental backdrop for the sector, given questions as to when the oil market will rebalance. 

However, with relatively stronger balance sheets and access to cash, large energy companies are in a much better place than the entire oil patch, which is facing high insolvency risk. And cash flow should improve if the higher price of oil persists. However, an increasingly onerous regulatory environment and clean-energy initiatives may be a significant headwind to the sector—though this may be more of a long-term issue, as there is likely little bipartisan appetite to erode U.S. energy independence. Additionally, larger oil and gas companies—which have the resources to navigate a more complex regulatory environment—will likely gain market share from smaller companies.

Positives for the sector:

  • Oil is priced above the level at which the average company can cover expenses
  • Supply has declined with lower production, though OPEC is planning an increase
  • Large diversified energy companies have strong balance sheets and access to capital
  • The ongoing  recovery of the global economy bodes well for returning oil demand
  • Valuations—though opaque—may be attractive

Negatives for the sector:

  • Oil demand is still down, though improving
  • Onerous regulatory environment

Risks to the sector:

  • OPEC’s current supply agreement could fail if prices rise much higher
  • Clean-energy initiatives eventually may dampen demand for oil


Financials: Outperform


The Financials sector includes banks, savings and loans, insurers, investment banking, brokerages, mortgage finance companies and mortgage real estate investment trusts.

The recent passage of the $1.9 trillion dollar stimulus package raises the potential for stronger economic growth. Combined with a Federal Reserve that is likely to maintain hyper stimulus for until 2023, and the rollout of effective vaccines, longer-term interest rates could continue to rise—augmenting solid fundamentals in the Financials sector. 

Banks’ balance sheets came into the pandemic crisis relatively strong, thanks in part to stringent regulations put in place since the financial crisis of 2008. The two stress tests conducted by the Federal Reserve last year confirmed this. Under the most rigorous scenario—a W-shaped double-dip recession—banks’ aggregate capital reduction would leave them with still-adequate capital ratios. Fiscal and monetary stimulus measures—which have contributed to the recovery—have softened the expected wave of bankruptcies and defaults. This is allowing banks to release loan loss reserves that were increased dramatically early in the crisis—effectively reversing previous expenses, which increases profits. 

The Fed’s commitment to keeping short-term interest rates low likely opens the possibility for the yield curve (the difference between short-term and long-term interest rates) to continue to steepen, which would help net interest margin revenues. The sector tends to outperform in the recovery and expansion stages of the business cycle, and still-attractive valuations and strong financial positions are enough to lead to continued outperformance. Risks would include: A surge in inflation could cause interest rates to rise too quickly and/or the Fed to tighten monetary policy—stalling the economic recovery. Or there could be significant increase in regulations on the sector under the new administration. But stacking up the positives, negatives and risks, we think the sector is more likely to outperform the overall market in the coming months. 

Positives for the sector:

  • Companies generally are in a strong financial position due to stringent post-2008 regulations
  • Economic recovery and fiscal stimulus are tailwinds for loan demand, and likely will limit defaults
  • A cautious Fed, along with improving growth prospects, has started to steepen the yield curve
  • The sector has attractive valuations relative to its historical average and other sectors
  • High loan-loss reserves are being released (this supports earnings growth)

Negatives for the sector:

  • Despite long-term interest rates trending higher, rates in general are expected to remain low by historical standards
  • Regulatory environment is onerous

Risks for the sector:

  • A surge in inflation could cause rates to rise sharply or the Fed to tighten monetary policy, stalling economic growth
  • Banking regulations have increased


Health Care: Outperform



The Health Care sector includes hospitals, nursing homes, health care equipment and supplies, health care services (e.g., dialysis centers, lab testing) managed-care plans (e.g., health maintenance organizations, or HMOs), health care technology, pharmaceutical, biotechnology and life sciences companies.

Heading into the 2020 election, the Democratic Party’s health care proposals seemed to be major source of the angst. Now-President Joe Biden’s proposed “public option”—a more affordable, or free, alternative to private health insurance—and enhancements to the Affordable Care Act (ACA) raised questions about the sustainability of profit growth in the health care sector.

However, the Democrats have a razor-thin majority in the new Congress, and division between progressive and moderate Democrats could very well result in many of the more contentious health-care initiatives being much tamer or blocked altogether.

These more benign scenarios open the potential for renewed outperformance based on the long-term positives, including an aging global population and a growing middle class in emerging markets, all of whom will demand more extensive drug treatments and medical care over time. Valuations are relatively attractive, and balance sheets in the sector are solid, increasing the possibility of higher dividend payments, share-enhancing stock buybacks, and M&A.

There are still risks, however. Any legislation to control drug prices or raise corporate taxes could weigh on pharmaceutical companies’ profits. Additionally, the Supreme Court is expected to rule on the constitutionality of the individual mandate provision of the ACA in 2021, and that could lead to the entire ACA being repealed. However, in the opening arguments heard in November 2020, the majority of the justices indicated that a total repeal was unlikely, and there is little political appetite to allow disorder throughout the health-care system.

Positives for the sector:

  • Balance sheets are strong, with ample cash for dividends and M&A
  • Positive long-term demographic trends may support the sector, including an aging global population and a growing middle class in emerging markets
  • Demand is returning for elective procedures, drug sales, medical equipment and diagnostics
  • Valuations are attractive relative to the sector's historical average
  • Biotech and pharmaceuticals have strong drug development pipeline

Negatives for the sector:

  • High unemployment reduces health care insurance enrollment
  • Extended-care facilities have seen a decline in enrollments and are likely to see higher costs related to virus-mitigation requirements

Risks for the sector:

  • The Supreme Court is considering the constitutionality of the Affordable Care Act (ACA)
  • There is bipartisan support for prescription drug price controls
  • There is the possibility of reversal of the 2017 corporate tax cut
  • A potential resurgence in COVID-19 could reduce demand for elective medical care
  • The impact from any enhanced ACA legislation is unclear

Industrials: Marketperform



The Industrials sector includes aerospace and defense (e.g., airplanes, defense equipment) building products, electrical components and equipment, construction machinery, and services including transportation (e.g., airlines, railroads, trucking), construction, engineering and professional services.

With the economic recovery, the markets have been trading as would be typically seen in an early stage of the business cycle—which can be positive for this historically pro-cyclical sector. Additionally, prospects for an increase in infrastructure and clean-energy investment has supported the machinery and building materials industries. Transportation and air freight have benefited from a return in demand as economies reopen, in addition to relatively low fuel prices and interest rates. The aerospace and defense industry continues to face significant headwinds amid expected low airliner demand and uncertainty surrounding the political appetite for defense spending. While the path of the economy remains uncertain, the recovery provides a nice macroeconomic tailwind for the sector, but valuations are extended after strong relative performance.

Positives for the sector:

  • Capital expenditures are likely to increase if global growth continues to improve
  • The sector tends to outperform early in the business cycle
  • Many companies in the sector have cash-heavy balance sheets
  • Strong global trade and increase in online shopping are spurring demand for transportation

Negatives for the sector:

  • Capital expenditures have been tepid
  • Aircraft demand is likely to be weak until business and leisure travel resumes
  • Valuations are relatively unattractive

Risks for the sector:

  • While we’re currently neutral on the sector, if there is a stronger-than-expected surge in global growth or massive infrastructure stimulus, then it could perform better than expected


Information Technology: Marketperform


The Information Technology sector includes software and services, technology hardware and equipment (e.g., mobile phones, personal computers), semiconductors and semiconductor equipment.

Information technology is a highly concentrated sector, with just a handful of companies representing more than 50% of the sector’s weight—including the two behemoths Apple and Microsoft. While those are typically the primary driver of sector performance, impacts related to COVID-19 have been broad-based and positive for much of the sector, increasing consumer demand for PCs, gaming hardware, software, personal devices and online payment services (although at the expense of traditional credit card services by Visa and MasterCard).

Despite a surge in spending to accommodate remote working, weak capital expenditures ongoing supply chain issues have been a concern. However, there are signs that investment in cloud and networking equipment is picking up, which could persist if the economic recovery continues. Also, the ongoing rollout of 5G wireless infrastructure is likely to accelerate—increasing demand for telecommunication components and semiconductors.

Longer term, a trend away from globalization and pent-up demand for productivity-enhancing technologies are likely to improve the already solid financial position for much of the sector. Counterbalancing the strong fundamentals and price momentum, investor optimism about future growth potential has pushed valuations to well above the historical average; higher interest rates can weigh on investors’ perceived value of future earnings. Additionally, there are rising legislative and antitrust risks for some of the largest companies in the sector.

Positives for the sector:

  • 5G rollout and onshoring trends are themes that support fundamentals
  • Companies generally have strong balance sheets and earnings growth potential, with low funding costs
  • Financial services technology, and surging online retail are supporting cloud computing infrastructure and software
  • There are long-term growth tailwinds, as businesses enhance productivity with tech investment

Negatives for the sector:

  • Valuations are very stretched relative to the historical average, making higher interest rates a significant headwind
  • Capital expenditures are weak—albeit improving
  • Semiconductor prices are rising amid low supply and hoarding

The sector is highly concentrated in a few stocks

Risks for the sector:

  • Continued high unemployment could weigh on consumer technology revenues
  • There is the potential for antitrust suits in the U.S. and Europe
  • There is the potential for reversal of the 2017 corporate tax cuts, which have benefited the sector. 

Materials: Marketperform



The Materials sector includes companies that make or process chemicals, construction materials (e.g., bricks, cement), containers and packaging (e.g., metal, glass, plastic, cardboard), forest products (e.g., lumber, paper), and metals and mining (e.g., aluminum, steel, copper, gold, silver).

The Materials sector is sensitive to fluctuations in the global economy, the U.S. dollar, and inflationary pressures. Accommodative monetary and fiscal policies are underpinning global economic growth and pricing power. In this environment, the U.S. dollar has trended lower, which historically provides a strong tailwind for the sector.

The sector still faces challenges, however. While U.S. economic growth is strong, international growth is mixed. Nevertheless, there has been strong demand for industrial metals and increasing demand for chemicals (the largest industry in the sector). And any traction on the Biden administration’s clean energy and infrastructure initiatives could spark a boom for industrial metals and materials.

Positives for the sector:

  • Expectations are for an improving economy and weakening trend in the U.S. dollar
  • Improving global economic growth is supporting chemical demand and pricing power
  • Strong gold demand is supporting precious metals mining
  • Strong relative momentum
  • Relative strength is improving
  • U.S. clean energy and infrastructure spending could create a surge in demand for industrial materials

Negatives for the sector:

  • International growth and demand for materials is uneven
  • The slow recovery in the oil rig count is a headwind for oil-fracking chemicals

Risks for the sector:

  • A pickup in global COVID-19 cases
  • Potential stringent environmental regulations
  • Reversal of the 2017 corporate tax cuts

Real Estate: Marketperform



The Real Estate sector includes equity real estate investment trusts (REITs) that invest primarily in commercial properties (e.g., office buildings, retail centers, apartment buildings), and companies engaged in real estate development and operation, such as real estate agents, brokers and appraisers.

The COVID-19 pandemic continues to be a significant headwind to the overall REITs sector. Commercial property demand remains well below pre-crisis levels, as segments of the economy have yet to fully recover—which increases the risk of lease defaults, particularly for retail and hotel REITs. The outlook for office REITs is highly uncertain and will likely stay so until we know if there will be an enduring shift toward remote working. While net debt for the sector is low by historical standards, the risk to cash flow puts many REITs in a difficult position. And valuations have deteriorated.

There are some exceptions, however. Warehouse/distribution center demand appears to be outstripping supply—resulting in sharply rising rents. And with the rapid rise in home prices amid low rates and de-urbanization, REITs specializing in single-family home rentals and manufactured homes stand to benefit. If the economy recovers more quickly, people get back to work, and interest rates stay low as the Federal Reserve maintains accommodative monetary policy, the Real Estate sector could do very well. In a low-interest-rate environment combined with renewed demand for office and retail space, investors’ search for yield and attractive valuations could be a strong tailwind for the sector.

Positives for the sector:

  • Optimism for improving economic growth and vaccine distribution
  • Fiscal stimulus is a lifeline for those behind on apartment and retail space rent
  • Low interest rates are positive for funding and make REITs dividends more attractive to investors
  • Warehouse, data center and telecom towers are benefiting from technology trends
  • Single-family residential REITs segments are seeing strong demand and rising rents
  • Valuations are still relatively attractive
  • Long-term demographics support recovery in extended-care and assisted-living facilities

Negatives for the sector:

  • High unemployment can lead to multi-family lease defaults
  • A sharp turn higher in home-ownership rates and de-urbanization is a negative for multi-family housing
  • An accelerated shift to internet from brick-and-mortar stores puts retail REIT revenues at risk
  • Short-term uncertainty exists about workers returning to the office
  • Valuations have deteriorated

Risks for the sector:

  • A quicker-than-expected rise in interest rates could be a sharp headwind
  • A permanent rise in work-from-home could reduce demand for office real estate

Utilities: Underperform


The Utilities sector includes electric, gas and water utilities; independent power producers and energy traders; and companies that produce electricity using renewable sources (e.g., solar, wind, hydropower).

The Utilities sector has tended to perform relatively better when concerns about slowing economic growth resurface, and to underperform when those worries fade. That’s partly because of the sector’s traditional defensive nature and steady revenues—people need water, gas and electric services during all phases of the business cycle. Meanwhile, the low interest rates that typically come with a weak economy provide cheap funding for the large capital expenditures required in this industry.

However, while interest rates are low from a historical perspective, they have ramped higher as the economy continues to expand and stimulus is raising inflation expectations. On the flip side, there is the potential for a renewed decline in the economy to push rates even lower, or there could be significant government funding to Utilities as part of clean-energy initiatives that would benefit the sector’s profit outlook.

Positives for the sector:

  • Generally stable revenues
  • Investors often turn to utilities for dividend income when prevailing interest rates are low
  • Low yields provide low funding costs for this capital-intensive sector

Negatives for the sector:

  • Interest rates have begun to move higher
  • Economic recovery makes the sector less attractive relative to other sectors

Risks for the sector:

  • Uncertainty regarding potential clean-energy legislative funding 
  • Much higher interest rates due to unexpected rise in inflation

What do the ratings mean?

The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:

  • Outperform: likely to perform better than the S&P 500 index
  • Underperform: likely to perform worse than the S&P 500 index
  • Marketperform: likely to track the S&P 500 index


Our view on individual sectors

Schwab Sector Views can be useful in identifying stocks by sector for potential purchase or sale. Schwab clients can use the Portfolio Checkup tool to help ascertain and manage sector allocations. When it's time to make adjustments, clients can use the Stock Screener or Mutual Fund Screener to help identify buy or sell candidates in particular sectors. Schwab Equity Ratings also can provide an objective and powerful approach for helping you select and monitor stocks in each sector.

What You Can Do Next

Important Disclosures:

Schwab Sector Insights do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification and asset allocation do not ensure a profit and do not protect against losses in declining markets.

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Each of the sector lenses shown in the Sector Overview table—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.

Investing involves risk including loss of principal.

Currencies are speculative, very volatile and are not suitable for all investors.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held.

Risks of the REITs are similar to those associated with direct ownership of real estate, such as changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.

The policy analysis provided by the Charles Schwab and Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.

All corporate names are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

ternational investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

The Schwab Center for Financial Research (SCFR) is a division of Charles Schwab and Co., Inc.


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