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Schwab Sector Views: Macro View is Obscure, but the Earnings Landscape Is Clearer

Schwab Sector Views is our three- to six-month outlook for 11 stock sectors, which represent broad sectors of the economy. It is designed for investors looking for tactical ideas. We typically update our views every two weeks. 

Listen to the latest audio Schwab Sector Views.

Third-quarter earnings season is in full swing, and surprises at the sector level have been overwhelmingly to the upside. The ebb and flow of geopolitical risks, along with mixed signals from the economic data (and the markets), are making it difficult to commit to either a defensive or pro-cyclical stance on equity sectors from a top-down perspective. 

However, the bottom-up fundamentals of the sectors not only tell us what’s driving overall S&P 500® earnings growth, but also help inform our decisions on sector ratings. 

Topsy-turvy economic and market messages

The path of the economy is somewhat of a mystery right now. Are we emerging from a mid-cycle slowdown or on the precipice of a recession? Economic data has been quite bifurcated, and although recession fears have ebbed recently, the ongoing flood of policy-changing tweets out of Washington means we cannot give an all-clear—particularly as the election season heats up.

While consumer sentiment and spending have remained strong amid a strong job market, business confidence and investment have dropped within the context of sharp weakness in the manufacturing space. After cutting short-term interest rates for the third time this year in October, the Federal Reserve is also apparently uncertain, as it signaled that it may stand pat until it can determine the impact of the smoldering risks. 

At times, relative sector performance can provide confirmation of the economic landscape. And perhaps it has—it’s mixed! As you can see in the table below, both cyclical and defensive sectors have outperformed at the same time the market sets new highs. None of this is particularly decisive in terms of making our sector calls.

Both cyclical and defensive sectors have outperformed during the past year

S&P 500 Sector performance

Source: Schwab Center for Financial Research, Bloomberg, as of 11/4/2019. Past performance is no guarantee of future results.

How we read the tea leaves

As you may be aware, we in large part look though a top-down (macroeconomic) lens when formulating our equity sector views, starting with the overall economy and driving down to industry level. In the last installment of Sector Views, we delved into the impact interest rates have on relative sector performance. We also focus on trends that are specific to individual industries—whether it be secular changes in demographics or burgeoning technologies. While we don’t do analysis on individual companies, we do analyze their fundamentals and valuations as they are rolled up to the sector level.

Earnings season shakers and movers

Given that we’re heading into the final innings of earnings season—let’s take a look at the quarterly sector data and how it is affecting the overall market’s earnings landscape.

So far, Q3 earnings generally have surprised to the upside

Q3 Earnings Summary

Source: Schwab Center for Financial Research, Bloomberg, as of 11/06/2019. Quarterly earnings estimates are based on consensus forecasts according to Bloomberg Earnings Estimates (BEst) of the consistent stocks. Horizontal axis shows the percentage of companies in each sector that have reported earnings that were either more positive, in line or more negative than the consensus estimate for the company’s earnings. “Beat by” is the percentage by which reported earnings have surpassed the consensus estimate for the sector. Earnings growth is based on a year-over-year comparison with Q3 2018.

As the chart above shows, the vast majority of companies reporting so far have beat estimates—led by the Consumer Discretionary, Health Care and Technology sectors. Yet earnings growth of the S&P 500 (top row, right column) is reflecting retrenchment for Q3 2019 compared to the same quarter last year. Energy, Materials and Technology are the culprits. However, it’s important to consider that year-ago earnings overall were particularly strong on the heels of the 2017 tax legislation and jump in economic growth in 2017-2018. So it was a relatively high hurdle that is weighing on the year-over-year comparison, as can be seen below. 

Year-over-year earnings growth faces a high bar vs. 2017 and 2018

Earnings and Earnings Growth YoY

Source: Schwab Center for Financial Research, Bloomberg, S&P 500 Index, as of 11/04/2019. Quarterly forward earnings estimates are based on consensus forecast according to Bloomberg Earnings Estimates (BEst) of the consistent stocks.

In reality, the trend in earnings growth for the S&P 500 index actually remains strong, as can be seen in the quarterly estimated growth trend in the chart above, as well as in the annual forward earnings trend below, with calendar years 2019-2021 earnings expected to continue to climb. It is important to note, however, that those estimates have been coming down. While this is the typical pattern for consensus estimates, as excessive optimism merges with reality, we are keeping a close eye on the sharper drop off in longer-term earnings growth expectations that may be signaling that a cyclical peak in earnings is near.  

Earnings are expected to continue to climb in 2019 through 2021

S&P 500 Forward Earnings Estimates

Source: Schwab Center for Financial Research, Bloomberg, as of 10/28/2019 Annual forward earnings estimates are based on the consensus forecasts according to Bloomberg Earnings Estimates (BEst) of the consistent stocks. 

Bringing it back to the individual sectors, the trend in annual earnings is generally positive over the next two years. While the Energy and Materials sectors still face the usual volatility common to the commodity-intensive sectors, the growth in forward earnings estimates for the other sectors are supportive of continued gains expected for the overall S&P 500 Index. 

EPS by sector

Source: Schwab Center for Financial Research, Bloomberg, as of 11/04/2019. Yearly earnings are estimates for 2019 and 2020, and are based on consensus forecasts according to Bloomberg Earnings Estimates (BEst) of the consistent stocks. 

How does this shape our views?

As we stated above, the mix of signals at the macroeconomic level makes it difficult to pin down strong views on most of the sectors. So, we must rely more heavily on long-term industry trends and fundamentals to provide more clarity into the sectors that are less affected by the macro environment. 

The Health Care sector is currently the only sector we expect to outperform the broad market over the next three to six months. While there is considerable political risk as the presidential election season heats up and candidates discuss health-care system reform ideas (such as “Medicare for all”), long-term demographic trends, strong balance sheets and the potential for increased dividends provide a tailwind for the sector. Additionally, the Health Care sector is poised to see the strongest growth in earnings this year. 

While the Health Care sector’s long-term earnings growth projection is average, it sports the second-best valuations of the S&P 500 sectors—and is currently the only one with a price-earnings (P/E) ratio below its long-term median. Finally, just in case the economy slips toward recession, it is after all a historically defensive sector. 

PEs for each sector

* National Association of Real Estate Investment Trusts (NAREIT Total Average Price to Funds From Operations REIT Equity
Source: Schwab Center for Financial Research, Bloomberg as of 11/4/2019. Forward earnings estimates are based on consensus 12-month forecasts according to Bloomberg Earnings Estimates (BEst) of the consistent stocks. Long Term earnings estimates are based on consensus five-year forecasts according to Bloomberg Earnings Estimates (BEst) of the consistent stocks.

A final word

Keep in mind, 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 performance of your portfolio.

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 11/05/2019

Communication Services Underperform 09/28/2018 10.4% 26.9%

Consumer Discretionary





Consumer Staples















Health Care










Information Technology










Real Estate










S&P 500  index 






Source: Schwab Center for Financial Research, FactSet (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 09/30/2019; 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


*As represented by the S&P 500 index

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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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 rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.


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


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