Which U.S. Stock Market Sectors Have the Best Prospects Over the Next 12 Months?

Of the 10 sectors that make up the U.S. stock market, Global Insight’s Sector Rotation Strategy recommends that the financial and technology sectors should be in an overweight position for investing over the next four quarters. On the contrary, energy, basic materials, and utilities have relatively poor fundamentals for investment.

Currently, the financial sector has the best attributes for an overweight position. The sector's valuation is compelling, compared with both other sectors and historic experience. The fundamental views (four-quarter ahead and one-quarter ahead) are positive, and are supported by positive technical conditions. Additionally, a good dividend, a strong growth in profits, and a free cash flow all contribute to the relative appeal of the financial sector. The information technology sector also merits an overweight recommendation from all these perspectives, except the reading from the four-quarter fundamental view, which is neutral. One-quarter fundamental, as well as the technical and risk indicators, show an overweight position. Despite a relatively poor dividend yield and payout ratio, it has good sector valuations relative to the historic experience. In addition, it faces a bright outlook for strong growth in profits and free cash flow that are derived from the forecast of vigorous CapEx spending by other sectors.

By contrast, the relative view of the energy, basic materials, and utilities is unambiguously negative. In energy and materials, the strong gains in stock prices over the past 18 months produce solid readings from the technical indicator. However, the prospects for further strong growth on top of recent performance is much diminished, as evidenced by the poor reading from the fundamental view and the negative direction of the risk indicator.

Our Sector Rotation Strategy is produced as part of our World Industry Service's Stock Sector Benchmarks, designed to assist asset managers in identifying the most profitable sectors for investment in the U.S. and international stock markets. This service is updated on a quarterly basis for all clients of this service.

A full description of the Sector Rotation Model and factors driving the current recommendations are available to subscribers on the Cost and Industry section of the Global Insight Web site.

Additional information on the World Industry Service, which provides the platform and fundamental forecasts for the Stock Sector Rotation Model, is available at the following links:

• World Industry Service
• WIS Stock Sector Benchmarks
• WIS Sector Risk Ratings

Figure 1

Recommended Portfolio Weighting for 10 U.S. Stock Market Sectors Over Next 4 Quarters

Over (+), Equal (=) or Under (-) Weight Setting relative to the Portfolio Benchmark

April 2006

by Mark Killion, CFA, and Natasha Muravytska