This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Fundamental Momentum Slowing for Cyclical Sectors

For some time we have noted that traditional Cyclical and Value sectors have had much stronger earnings estimate revisions activity (“fundamental momentum”) than Growth or Defensive sectors. That has been changing recently as cyclical sector estimates are less strong than before, and Growth and Defensive are holding up better. Thus we have recently been looking more favorably on certain Growth or Defensive sectors and neutralizing exposure to Cyclical/Value areas.

The tables below update our US sector revisions breadth readings, based on our ~2300 stock US universe (revisions breadth = net % of analysts raising earnings estimates vs lowering estimates). The left table shows the calculations that give equal weight to each stock’s revisions breadth in a sector, and the right table shows figures that weight each stock’s breadth by its proportional market cap (like cap-weighted market indices do).

Source: Mill Street Research, Factset

A few key points jump out:

  • Most sectors still have positive net revisions breadth, meaning more analysts have been raising estimates than lowering them. So almost none are outright weak, and earnings estimates generally continue to rise at a solid pace.
  • The sectors showing improvement versus three months ago on a cap-weighted basis are all Growth or Defensive sectors: Communication Services, Technology, Real Estate, Consumer Staples, Health Care, Utilities. The rest (Value/Cyclical areas) have weakened from earlier high levels, some significantly.
  • On an equal-weighted basis, the only sector to see improvement versus three months ago is Real Estate. The biggest decliners have been Materials, Industrials, Energy, and Financials – all Value/Cyclical sectors. Technology was little changed.
  • There are notable differences in the equal-weighted versus cap-weighted (CW) breadth readings, especially in Consumer Discretionary, Technology, and Communication Services. This is due to the influence of a few mega-cap stocks that dominate the cap-weighted readings in those sectors, such as Amazon.com (AMZN), Apple (AAPL), and Alphabet (GOOGL). Overall, large-caps (that heavily influence the cap-weighted data) have stronger revisions activity than mid/small-caps.

These trends suggest that Cyclical/Value sectors no longer have the commanding lead in fundamental momentum that they did earlier in the year, which is consistent with solid but more moderate economic growth and concerns about the renewed impacts of the Delta variant of COVID on both demand and supply chains. These fundamental trends align with relative performance of Growth and certain Defensive areas versus Value or Cyclical areas recently, especially when viewed on a cap-weighted basis, and suggest there could be more to come. Our preferences along these lines are for Technology, Communication Services, and Real Estate. For those seeking Value exposure, Financials looks most attractive among sectors.

Originally Posted on September 16, 2021 – Fundamental Momentum Slowing for Cyclical Sectors

Disclosure: Mill Street Research

Source for data and statistics: Mill Street Research, FactSet, Bloomberg

This report is not intended to provide investment advice. This report does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. Past performance is not a guarantee of future results, and no representation or warranty, express or implied, is made regarding future performance of any security mentioned in this report.

All information, opinions and statistical data contained in this report were obtained or derived from public sources believed to be reliable, but Mill Street does not represent that any such information, opinion or statistical data is accurate or complete. All estimates, opinions and recommendations expressed herein constitute judgments as of the date of this report and are subject to change without notice.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Mill Street Research and is being posted with permission from Mill Street Research. The views expressed in this material are solely those of the author and/or Mill Street Research and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

trading top