Sectors Portfolio: Higher Yields, Higher Hurdles

The US remains firmly in reflation, but the investment backdrop is becoming more precarious. Resilient growth should continue to support earnings and broad risk appetite, but sticky inflation, renewed policy tightening and rising long-term yields leave less room for error. With Q3 earnings season beginning, we are favouring sectors with improving fundamentals while limiting exposure to long-duration and rate-sensitive areas of the market.
The Health Care sector is now our largest overweight and the portfolio’s primary defensive allocation. Unlike most defensive sectors, earnings momentum (see Chart 4) has strengthened materially (+17%). However, sales growth remains modest at 3.4%, indicating that margin expansion rather than stronger demand is driving the improvement. Even so, the sector’s strengthening earnings profile provides a more compelling balance of resilience and growth than other defensive areas, despite its elevated valuation relative to history.
Financials offer one of the most compelling risk-reward opportunities. The sector was September’s weakest performer despite improving earnings expectations and some of the strongest forward cash-flow growth over the next 12 months. The recent pullback has improved valuations without materially altering the fundamental outlook, creating a more attractive entry point heading into earnings season.
Technology remains the market’s strongest earnings story, but elevated long-term Treasury yields are an increasingly important headwind. The sector continues to lead on both forward earnings and sales growth, with both measures more than three standard deviations above their long-term averages. However, Technology’s long-duration characteristics leave valuations particularly sensitive to higher discount rates. We remain constructive on the earnings outlook, but the pressure from elevated long-term yields supports a neutral position.
Consumer Discretionary and Communication Services face a more demanding setup. Both sectors continue to trade at premium valuations despite relatively weak earnings-growth expectations over the next 12 months. Communication Services has delivered impressive recent performance, but much of that strength has been driven by Meta’s outsized gains (+30%), rather than a broad-based improvement in earnings. Until growth expectations stabilize or valuations become more compelling, we remain cautious.
Utilities and Real Estate face the highest hurdle. While both sectors trade below their historical valuation ranges, fundamental headwinds remain significant. Utilities face weakening cash-flow expectations, while Real Estate continues to contend with elevated financing costs. With long-term yields still acting as a headwind, valuation support alone is unlikely to drive sustained outperformance.
For the portfolio: We are making the following changes:
- Tech: Sector weight is unchanged from last month. Our position has changed from overweight to neutral following the increase in benchmark weight.
- Financials: Our position is still overweight, but weight is slightly higher than last month.
- Health Care: Our position has changed from neutral to overweight. We are adding weight relative to last month.
- Communication Services: Our position is still underweight, but weight is higher than last month to be in line with the index.
- Industrials: Our position is still neutral, but weight is lower than last month.
- Materials: Our position has changed from overweight to neutral.
- Discretionary: Our position is still underweight. We are trimming our weight relative to last month.
- Real Estate: Our position is still neutral, but weight is slightly lower than last month.

Benchmark is the S&P 500 Index.

Sectors in focus:

Health Care (BMO SPDR Health Care Select Sector Index ETF – ZXLV)
Financials (BMO SPDR Consumer Financials Select Sector Index ETF - ZXLF)
Technology (BMO SPDR Technology Select Sector Index ETF – ZXLK)

Please see Chart 5 below for the monthly performance and refer to Chart 6 for the monthly tactical changes in the model BMO Sector Model Portfolio.

Chart 1 – Sector Total Performance Chart

Source: Bloomberg, BMO Global Asset Management. Month-to-Date Returns; Data as of September 29^th, 2026.

Chart 2 – Forward Cash Flow from Operations (CFO) Growth – Next 12m

Source: Bloomberg, BMO Global Asset Management. Data as of September 29^th, 2026.

Chart 3 – Earnings and Valuation

Table 4 – Earnings and Valuation Relative to History

*As of September 29^th, 2026 Source: Bloomberg, BMO Global Asset Management. 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 5 – BMO Sector Model Portfolio Performance in 2026

	Year-to-date	1-Month	3-Month	6-Month	Since Inception	Inception Date
BMO Model Sector Portfolio (%)	17.24%	1.89%	1.50%	25.27%	17.24%	12/31/2025

Source: BMO Global Asset Management. Data as of September 29^th, 2026. Past performance is not indicative of future results.

Chart 6 – BMO Sector ETF Portfolio for October 2026

Chart 7 – BMO Sector ETF Portfolio Weights Relative to S&P 500

Chart 8 – Sector Returns

Source: Bloomberg, BMO Global Asset Management. As of September 29, 2026. Past performance is not indictive of future results. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index.

Chart 9 – Seasonality Chart (Avg Rank Over Past 35 Years)

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