Breadth is Back
Broader market leadership is emerging, but with concentration risks lingering, we favour selective sector exposure led by an overweight in Materials.
- US equities are entering the second half of 2026 with broader participation, but concentration risk remains elevated. The S&P 500 is up 9.2% year-to-date (YTD), with six of eleven sectors outperforming the index. That breadth is encouraging, but Tech still carries a large share of index weight, leaving the market highly exposed to AI sentiment.
- Tech still has the strongest earnings support after Energy. Twelve-month forward earnings expectations continue to move higher, supported by resilient AI demand and positive revisions. Valuations remain below long-term averages, keeping the setup constructive.
- The US energy sector has delivered the strongest YTD returns (Chart 1), but the momentum has faded. The sector is down 4% over the past month as prompt crude prices eased following the pickup in the Strait of Hormuz activity. Forward earnings expectations still screen strongest across sectors, but recent downgrades show how quickly the outlook can shift when oil prices or geopolitical risks move.
- In our portfolio, materials sector is the most compelling cyclical overweight for July. The sector is currently outperforming the S&P 500 year-to-date by 200bps but unlike Energy, the setup is less dependent on a single commodity headline. Chart 2 shows strong forward earnings growth, positive month-over-month revisions, and a reasonable valuation profile relative to other sectors.
- Industrials remain structurally attractive, but valuation is now the constraint. The sector is currently trading at a premium of approximately 1.7 standard deviations above historical norms (Chart 2). Industrials tied to AI infrastructure, electrification, grid upgrades, and automation have driven much of the YTD outperformance. The capex cycle still supports the sector, but a lot of that strength is already priced in (Chart 2)
- Across the defensive sectors, consumer staples is the lone sector marginally ahead of the index, while healthcare is the clear laggard. The healthcare sector has rebounded sharply from its March drawdown. The move has been driven largely by improving sentiment around Medicare Advantage reimbursement rates and renewed M&A activity, rather than stronger earnings expectations. With valuations now above historical norms and forward earnings revisions essentially flat, the sector looks less compelling.
- For the portfolio: We are making the following changes:
- Materials: Our position is still overweight, but weight is higher than last month.
- Industrials: Our position is still neutral, but weight is slightly higher than last month to be in line with index weight.
- Healthcare: Our position is neutral. We are trimming our weight relative to last month.
- Financials: Our position is still neutral, but weight is slightly lower than last month to be in line with index weight.
- Energy: Our position is still neutral, but weight is slightly lower than last month to be in line with index weight.
Sectors in focus:
- Health Care (BMO SPDR Health Care Select Sector Index ETF – ZXLV)
- Industrials (BMO SPDR Industrials Select Sector Index ETF – ZXLI)
- Materials (BMO SPDR Materials Select Sector Index ETF -ZXLB)
Please see Chart 4 below for the monthly performance and refer to Chart 5 for the monthly tactical changes in the model BMO Sector Model Portfolio.
Chart 1 – Sector Total Performance Chart
Chart 2 – Earnings and Valuation
Z-Score is a measure of how much a data point varies from the average of the entire data set. A positive z-score says the data point is above average. A negative z-score says the data point is below average. The closer the Z-score is to zero, the closer the value is to the mean. Red = more bearish signal. Green = more bullish signal. For illustrative purposes only.
Past performance is not indicative of future returns.
Chart 3 – S&P 500 Industrials by Category
Z-Score is a measure of how much a data point varies from the average of the entire data set. A positive z-score says the data point is above average. A negative z-score says the data point is below average. The closer the Z-score is to zero, the closer the value is to the mean. Red = more bearish signal. Green = more bullish signal. For illustrative purposes only. Past performance is not indicative of future returns.
Chart 4 – BMO Sector Model Portfolio Performance in 2026
Chart 5 – BMO Sector ETF Portfolio for July 2026
Chart 6 – BMO Sector ETF Portfolio Weights Relative to S&P 500
Chart 7 – Sector Returns
Chart 8 – Seasonality Chart (Avg Rank Over Past 35 Years)
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This material is for information purposes only. The information contained herein is not, and should not be construed as investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated and professional advice should be obtained with respect to any circumstance.
The viewpoints expressed represent the assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
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