Sectors Portfolio: Full of Surprises
- Q2 2026 earnings season is in full swing, and it has been full of positive surprises, reinforcing the resilience of the US equities. With roughly 60% of the S&P 500 having reported, 86% of the companies have delivered positive earnings surprise which is above the 5-year average of 78%. Despite higher yields in the long-end, earnings continue to surprise to the upside, reflecting an economy that remains stronger than expected.
- The biggest surprises are still coming from familiar names. Amazon and Alphabet have each delivered earnings surprises of roughly 214%, driving much of the earnings strength in Consumer Discretionary and Communication Services, respectively. Despite this, they also highlight that market leadership remains concentrated in a few names. Meanwhile, Real Estate has emerged as the weakest sector this earnings season (Chart 2).
- Not all surprises have come from Big Tech. One of the more notable developments this earnings season has been the resilience of the Financials. The combination of improving fundamentals, reasonable valuations, and a strong capital markets backdrop leaves the sector well positioned.
- While AI-related demand continues to anchor tech sector performance, forward 12-month earnings expectations declined modestly over the past month following an extended period of upgrades. Valuations remain below long-term norms, and leverage ratios continue to show healthy balance sheets, suggesting the sector still has fundamental support.
- The energy sector continues to screen as one of the strongest sectors for expected earnings growth, yet recent months have highlighted how quickly sentiment can shift as geopolitical risk premiums rise and fall. While earnings support remains robust, the sector’s outlook is less predictable than other sectors, justifying a neutral stance.
- Earnings momentum in the Materials sector has slowed since last month. With that in mind, we are reducing our weight slightly.
- Industrials continue to benefit from long-term structural themes, but valuations are becoming difficult to ignore. Exposure to AI infrastructure, electrification, automation and reshoring remains a powerful tailwind for the sector. However, much of that optimism is already reflected in current valuations. We continue to stay constructive, but the risk-reward is less compelling after a strong period of outperformance, keeping our positioning neutral.
- We remain more cautious on the defensive sectors. Healthcare has recovered sharply, but valuations have moved well above historical norms while earnings revisions have softened. Consumer Staples, Utilities and Real Estate continue to face a combination of slower growth, elevated financing costs and weaker earnings momentum.
- For the portfolio: We are making the following changes:
- Financials: Our position is overweight, as we remain constructive.
- Healthcare: Our position is neutral. We are trimming our weight relative to last month.
- Discretionary: Our position is still neutral, but weight is slightly higher than last month to be in line with index weight.
- Industrials: Our position is still neutral, but weight is slightly higher than last month to be in line with index weight.
- Materials: Our position is still overweight, but weight is lower than last month.
- Staples: Our position is still neutral, but weight is slightly lower than last month.
Sectors in focus:
- Financials (BMO SPDR Financials Select Sector Index ETF – ZXLF)
- 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 Surprise by Sector
Chart 3 – Earnings and Valuation
Chart 4 – BMO Sector Model Portfolio Performance in 2026
|
YTD |
1-Month |
3-Month |
6-Month |
Since Inception |
Inception Date |
|
|
BMO Model Sector Portfolio (%) |
11.97 |
-3.07 |
8.77 |
13.11 |
11.97 |
12/31/2025 |
Source: Bloomberg, BMO Global Asset Management. As of July 30th, 2026.
Chart 5 – BMO Sector ETF Portfolio for August 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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