Sector portfolio: Resilience with a selective tilt
- Q3 2025 earnings have been broadly resilient, with 87% of S&P 500 companies beating earnings per share (EPS) estimates as of October 31. But beneath the strong headline numbers, earnings breadth is narrowing. Markets are increasingly rewarding companies and sectors that meet two critical tests: 1) Turning AI/capex investments into credible gains; 2) Operating in sectors with structural quality (cash flow resilience, healthy balance sheets)
- The strength in earnings for Q3 2025 has been concentrated in Technology, Financials and Utilities. Meanwhile, Consumer Discretionary, Energy, and Materials delivered mixed results, reflecting a U.S. economy that remains robust but is decelerating at the margin.
- This narrow leadership mirrors a macro environment that is steady, but selective. Consumption remains resilient, but spending has rotated from goods to services, compressing margins for discretionary firms exposed to mid-and lower income consumers (see Charts 1 and 2 below).
- Growth remains stable, but labour costs and inflation pressures continue to persist, and interest rates remain elevated. The Federal Reserve eased again in late October with a 25-basis point (bps) cut, continuing a cautious shift in policy.
- Financials continue to benefit directly from higher-for-longer rates, with improved net interest margins and strong balance sheets. The quality tilt favours large-cap banks and insurers with predictable earnings in a rate-sensitive environment.
- In Tech, the focus is shifting from promise to performance. Firms are being evaluated on their ability to translate AI and related capex investments into durable revenue and margin expansion. Top performers are distinguished by healthy cash flows and credible execution (see Charts 3 and 4 below).
- Utilities and Health Care are the quiet outperformers this season. Utilities surprised to the upside, driven by cost-passthroughs, infrastructure upgrades, and AI-driven energy demand. Regulatory tailwinds are also supportive of defensive positioning and margin growth.
- Health Care has emerged as a standout, with over 90% of companies reporting positive earnings surprises. Regulatory clarity and infrastructure support further contributed to the sector’s momentum. Volume growth remained strong in essential care segments as investors rotated into stable, cash-generating sectors. As we noted last month, the sector has “healed” and is now contributing meaningfully to overall market returns.
Sectors in focus:
- Financials (BMO SPDR Financials Select Sector Index ETF – ZXLF)
- Technology (BMO SPDR Technology Select Sector Index ETF – ZXLK)
- Health Care (BMO SPDR Health Care Select Sector Index ETF – ZXLV)
- Utilities (BMO SPDR Utilities Select Sector Index ETF – ZXLU)
Please see Chart 5 below for the monthly tactical changes in the model BMO Sector ETF Portfolio.
Chart 1 – Consumer spend breakdown (quarter-over-quarter)
Source: BEA, BMO Global Asset Management, as of September 30, 2025. % change.
Chart 2 – Profit margin by industry in Consumer Discretionary sector
| Industry | Profit Margin (%) | ||||||
| Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | |
| Automobile Components | 4.4 | 18.6 | 7.5 | 5.5 | -0.2 | 7.5 | -6.8 |
| Automobiles | 5.5 | 5.1 | 5.6 | 2.2 | 3.2 | 3.1 | 4.2 |
| Broadline Retail | 12.2 | 8.9 | 17.1 | 18.5 | 15.2 | 12.2 | 17.1 |
| Distributors | 5.2 | 6.9 | 6.0 | 3.6 | 4.4 | 6.8 | 5.8 |
| Hotels, Restaurants & Leisure | 10.3 | 11.4 | 13.8 | 13.8 | 11.6 | 10.2 | 13.6 |
| Household Durables | 13.4 | 13.8 | 14.6 | 14.0 | 11.3 | 11.8 | 11.5 |
| Leisure Products | 7.7 | 13.9 | 17.4 | -3.1 | 11.1 | -87.3 | 16.8 |
| Specialty Retail | 9.5 | 10.7 | 10.1 | 9.6 | 9.1 | 9.8 | 9.8 |
| Textiles, Apparel & Luxury Goods | 14.7 | 11.1 | 13.1 | 14.0 | 14.1 | 10.0 | 4.5 |
Source: Bloomberg, BMO Global Aaset Management, as of September 30, 2025.
Chart 3 – Mag 7 revenue growth vs. capex
Source: Bloomberg, BMO Global Asset Management, as of September 30, 2025.
Chart 4 – Mag 7 price changes after earnings reported
Source: Bloomberg, BMO Global Asset Management. For Q3 reporting period, dates vary.
Chart 5 – BMO sector ETF portfolio for November
| Index | Sector Portfolio | Difference | Weighting | Change from Last Month | |
| S&P 500 | 100.00% | 100.00% | |||
| Tech | 36.23% | 37.50% | 1.27% | Overweight | 1.00% |
| Financials | 12.78% | 15.00% | 2.23% | Overweight | 2.00% |
| Comms. | 10.71% | 10.00% | -0.71% | Neutral | -1.50% |
| Health care | 10.05% | 12.50% | 2.45% | Overweight | 2.50% |
| Disc. | 8.91% | 6.50% | -2.41% | Underweight | 0.50% |
| Industrials | 8.08% | 6.50% | -1.58% | Underweight | 0.50% |
| Energy | 4.64% | 1.00% | -3.64% | Underweight | -2.00% |
| Materials | 2.79% | 1.00% | -1.79% | Underweight | 0.00% |
| Utilities | 2.33% | 5.50% | 3.17% | Overweight | 0.50% |
| Real estate | 1.83% | 2.00% | 0.17% | Neutral | 0.00% |
| Staples | 1.64% | 2.50% | 0.86% | Neutral | -3.50% |
Source: BMO Global Asset Management, November 2025. For illustrative purposes only. Past performance is not indicative of future returns. The portfolio holdings are subject to change without notice.
Chart 6 – BMO sector ETF portfolio weights relative to S&P 500
Source: BMO Global Asset Management, November 2025. For illustrative purposes only. Past performance is not indicative of future returns. The portfolio holdings are subject to change without notice.
Chart 7 – Sector returns
*MAVG = moving average. Source: BMO Global Asset Management, Bloomberg, as of October 31, 2025. The 50/100 day moving average is calculated by averaging the closing prices of a stock or asset over the past 50/100 trading days, and is used by analysts to identify trends. Green = more bullish signal. Red = more bearish signal. For illustrative purposes only. Past performance is not indicative of future returns.
Chart 8 – Earnings and valuation
Source: BMO Global Asset Management, Bloomberg, as of October 31, 2025. Y/Y = year over year. P/E refers to Price-to-Earnings Ratio, which analysts use as a valuation metric. The forward P/E ratio (or forward price-to-earnings ratio) divides the current share price of a company by the estimated future (“forward”) EPS of that company. 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 9 – Seasonality chart (average rank over past 35 years)
Source: BMO Global Asset Management, Bloomberg, as of October 31, 2025. For illustrative purposes only. Past performance is not indicative of future returns.
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