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Schwab Sector Views: Looking for Direction

Schwab Sector Views: Looking for Direction


Listen to the latest audio Schwab Sector Views.

Schwab Sector Views is 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. 

As summer unfolds, investors may feel like they’re driving without a road map. Corporate earnings reporting season for Q2 has kicked off, but the focus is less about the second quarter results and more about what companies have to say about the future. COVID-19 cases have risen again in many states, once again weighing heavily on many economically sensitive cyclical sectors. And a recent swing in poll numbers has investors starting to re-evaluate the potential corporate tax implications of the upcoming elections.

Summer earnings season may drive outlook

With all eyes staring out the windshield, investors are focused on what companies are seeing heading in the second half of the year. At quarter-end, expectations had been set very low, with S&P 500® index estimates for Q2 down more than 42% since the start of the year, and the estimates for all of 2020 down nearly 28%. 

The cuts weren’t equal across the board. After the crash in oil prices earlier this year, analysts cut expectations the most for the Energy sector (-106%), while the Industrials and Consumer Discretionary sectors’ 2020 earnings forecasts were both cut by 56%. At the other end of the spectrum, reductions for Utilities and Information Technology were relatively small.

Earnings expectations have been cut significantly


Source: Charles Schwab, Bloomberg, as of 07/10/2020. Reflects percent change in 2020 sector earnings expectations since 12/31/2019.

Typically, analyst expectations undershoot actual results, particularly following big drawdowns in the markets and a recovery in timely economic indicators. Either way, we expect to see plenty of big surprises—both positive and negative—to drive performance over the coming weeks. More than 40% of S&P 500 companies had withdrawn their earnings guidance by June 25th, according to the Wall Street Journal.1 With the lack of guidance, there is the potential that analysts have been too aggressive in cutting forecasts and possibly too slow to raise them, given the bounce in oil prices and strong rebound in many economic indicators, such as purchasing manager indexes and retail sales. Consensus analyst estimates do appear to have bottomed for many sectors, and have turned higher for several others. 

Do valuations matter? 

Stock prices, in theory, reflect anticipated future earnings, but many already have rallied sharply ahead of analysts’ expectations—raising S&P 500 forward valuations to a levels that is well above its historical average. Because analyst estimates usually lag in recoveries, forward price-to-earnings (P/E) ratios do typically rise, but the extent of the recent rise has pushed valuations to levels not seen since the tech bubble in the late 1990s/early 2000s. 

The S&P 500 index forward price/earnings ratio is at the highest level in 20 years


Source: Charles Schwab, Bloomberg, as of 07/10/2020. The forward P/E (price-to-earnings) ratio divides the current share price of a company by the estimated future (“forward”) earnings per share.

There has been a lot of discussion lately about whether any of the valuation metrics are worth examining, not only because of the heightened uncertainty, but because we’re no longer dealing with a completely free market, so to speak. The Federal Reserve and other central banks have purposely supported asset prices—directly in terms of bonds, and indirectly for riskier assets like stocks— by squashing Treasury yields to near zero. Based on the assumption that rates will stay low for years to come—something the Fed has all but promised—the low discount rate that informs current valuations of future corporate earnings translates into P/E ratios that theoretically can be sustained at levels much higher than the historical averages. 

Whether this turns out to be the case remains to be seen. However, for now, we can compare sectors to get a view of relative valuations, to identify those that are less overvalued than others. The chart below shows a compilation of numerous forward and trailing valuation metrics, such as dividend yield, price-to-earnings, and price-to-cash flow among others. From them, we can see that Consumer Discretionary and Information Technology are the most overvalued on a relative basis (red bars), while Health Care, Energy and Financials are the most undervalued (green bars). Keep in mind that valuations should be used in the context of many other considerations—such as the macroeconomic environment, fundamentals and behavioral factors (momentum, sentiment, etc.), as well as factors such as geopolitical changes.

Relative sector valuations


Source: Charles Schwab, Bloomberg as of 07/9/2020.

Note: Certain high-growth sectors—like Information Technology and Consumer Discretionary—typically command higher valuations. To account for this and other factors, such as variability in earnings and stock prices, we standardized each sector’s metrics by examining valuations relative to their respective historical averages. Specifically, we calculated the number of standard deviations the current valuation readings are above or below their historic average (also known as the “Z-score”). For illustrative purposes, the bars are colored red (relatively overvalued) and green (relatively undervalued) to identify sectors referred to in the text above the chart.

The election is adding to uncertainty

The outcome of the 2020 election is anybody’s guess (we are not going to try), as are any legislative initiatives that may be proposed by the future party in control of the White House, the Senate and the House of Representatives. But one potential initiative being assessed is tax policy—particularly given the massive run-up in government debt throughout the COVID-19 crisis. One possibility is that some or all of the Tax Cuts and Jobs Act implemented in 2018 could be reversed, raising the effective corporate tax rate. 

If that should happen, the impact would not be equal across all equity sectors. As can be seen in the table below, the Information Technology and Heath Care sectors benefited the most from the 2018 tax cuts, and therefore their earnings could fare the worst if reversed. Energy and Communication Services could be the beneficiaries if some of the provisions that resulted in higher taxes in 2018 are reversed.  

It’s too soon to know what will happen, but this does color our view on these sectors, in as much as it creates another layer of uncertainty. 


Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

See NDR Disclaimer at For data vendor disclaimers refer to


What direction will the coronavirus take? 

The daily count of new COVID-19 cases has ballooned in recent weeks. Thankfully, the death count has not yet followed. Nevertheless, there are a number of industries within the Consumer Discretionary sector that are heavily affected by the coronavirus and related social-distancing measures, including airlines, hotels and leisure industries. With the uptick in cases and signs of renewed social distancing, these have sharply underperform over the past month. 

As COVID-19 cases have risen, airlines, hotels and leisure stocks have declined

COVID cases

Source: Charles Schwab, Bloomberg. Hotel, Airlines, Leisure Index is an equal-weighted composite of the S&P 500 Index Hotel, Airlines and Leisure industry indexes.

It’s not just the consumer-oriented industries that have been affected by the renewed uncertainties. As the economic recovery has shown signs of leveling off, the Industrials and Energy sectors also have sharply underperformed. There are concerns that what seemed to be a V-shaped economic recovery could become a “W” if social distancing increases again—whether mandated or voluntary. As Federal Reserve Vice Chair Richard Clarida put it recently, “ultimately, the course of the economy is going to depend on the course of the virus, and we’re following it very closely.”

Could Financials be vulnerable? 

Currently, we have an outperform rating on the Financials sector, but there have been some developments recently that we’re watching. 

One of the pillars for our current outperform rating on the sector is that banks’ balance sheets entered the crisis relatively strong, thanks in part to stringent regulations put in place since 2008. The recent stress test conducted by the Fed 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. Importantly, this scenario does not include the potential positive impact from government stimulus, and the Fed has trillions of dollars at its disposal as part of its Main Street New Loan Facilities, which should mitigate bankruptcies and defaults.  

Nevertheless, a provision of the stress test does raise some uncertainty. Future dividend payouts will be based on a formula dependent on banks’ trailing quarterly net income, which could force reductions going forward. Additionally, banks will need to re-run their stress tests later this year.  

Loan defaults are expected to rise significantly in coming months, to be sure, but sharp downward earnings expectations likely have reflected much of this—and those revisions have stabilized for Financials. Despite lower expected earnings, however, valuations are relatively attractive, in part due to sharp underperformance of the sector year-to-date.  

Even though rising longer-term interest rates are not a primary consideration in our outperform rating, as we expect rates to remain relatively low, the gradual rise amid growing economic optimism had helped Financials outperform in late spring. However, there was extensive discussion at the June Federal Open Market Committee meeting regarding yield-curve targeting—that is, controlling longer-term rates as well as short-term rates. While there is not a current plan to implement such a policy, the fact that policymakers discussed it in such detail and continue to research it has gotten investors’ attention. That, combined with rising COVID-19 cases and a step back in economic optimism, has pushed yields lower again, which has weighed on the Financials sector’s performance. While we’re watching the latest developments, we still think that the generally improving trend in the macroeconomic environment, combined with attractive valuations and solid fundamentals, support an outperform rating. 

A final word

Keep in mind that no matter what our view is on any of the sectors, remaining diversified is very important. Concentrating in too few sectors can dramatically affect the risk profile and performance of your portfolio. So if you do make any sector tilts in your portfolio, keeping them small is a good way to maintain appropriate diversification and potentially enhance the performance of your portfolio. Visit the Sector Views tab on Insights & Ideas for a summary of our views on all 11 S&P 500 Index sectors. 

1 Prang, Allison, “Coronavirus Erases Guidance From 40% of S&P 500,” The Wall Street Journal, June 28, 2020.

Sector Overview

Sector Views main table

Note: Each of the sector lenses shown above—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.

Source: Charles Schwab, as of 7/16/2020.

Schwab Sector Views: Our current outlook


Schwab Sector View

Date of last change to Schwab Sector View

Share of the

S&P 500® Index

Year-to-date total return as of 07/14/2020

Communication Services





Consumer Discretionary





Consumer Staples















Health Care










Information Technology










Real Estate










S&P 500 Index





Source: Schwab Center for Financial Research, Bloomberg (for YTD total returns) and S&P Dow Jones Indices (for S&P 500 sector weightings). Sector performance data is based on total return for each S&P 500 sector subindex (see “Important Disclosures” for index definitions). Sector weighting data is as of 6/30/2020; data is rounded to the nearest tenth of a percent, so the aggregate weights for the index may not equal 100%. 

Past performance is no guarantee of future results.

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 broader stock market*
  • Underperform: likely to perform worse than the broader stock market
  • Marketperform: likely to track the broader stock market


Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in each sector.

* As represented by the S&P 500 index

Communication Services



Real Estate

Consumer Discretionary


Information Technology


Consumer Staples

Health Care




How should I use Schwab Sector Views?

Investors should generally be well-diversified across all stock market sectors. You can use the Standard & Poor's 500® Index allocations to each sector, listed in the chart above, as a guideline.

Investors who want to make tactical shifts in their portfolios can use Schwab Sector Views' outperform, underperform and marketperform ratings as a resource. These ratings can be helpful in evaluating and monitoring the domestic equity portion of your portfolio.

Schwab Sector Views can also be useful in identifying stocks by sector for potential purchase or sale. Schwab clients can use the Portfolio Checkup tool to help them review and manage their 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.

What you can do next

  • Review your sector allocation. If you aren’t sure how to analyze your sector weightings, a Schwab Financial Consultant can help. 
  • Explore our views on individual sectors in Sector Views.
  • Talk to us about the services that are right for you. Call us at 800-355-2162, visit a branchfind a consultant or open an account online.
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Real Estate Sector Rating: Marketperform

Important Disclosures:

Schwab Sector Views 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.

Market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

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.

Investing involves risk including loss of principal.

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

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


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