Sectors Portfolio: The Defensive Split
- The current reflationary backdrop of strong growth and sticky inflation generally favours cyclicals over defensives. However, each of the defensive sectors are responding quite differently. Utilities remain the worst performing sector year-to-date (Chart 1). The sector is currently trading at a 12-month forward P/E multiple of 16.6x, inexpensive relative to its own history, but elevated long-term yields remain a headwind. Moreover, the forward cash flow is expected to contract by 47%, the weakest outlook across sectors (Chart 2).
- Health Care sits at the other end of the defensive spectrum. The sector has gained roughly 15% over the past three months, following strong sector earnings. Positive Phase 3 results from Moderna and Merck renewed momentum, lifting large cap drugmakers to record highs. However, that strength now carries the most stretched relative valuation, trading at a multiple of 18.8x – significant premium above its 10-year average (Chart 3).
- Consumer Staples offer the least compelling defensive trade-off. The sector trades above its historical average but lacks the growth needed to justify that premium. Forward cash flow is also expected to contract by roughly 20% over the next 12 months. In a market supported by firm economic activity, paying a premium for limited growth and weaker cash flows is difficult to justify.
- Tech remains the market’s clearest growth story – particularly semiconductors. Chart 3 shows that the sector has the strongest forward earnings profile, with EPS growth of 56.7% and sales growth of 35.0%. Both measures are running more than three standard deviations above their historical norms. Yet Technology’s forward multiple remains modestly below its 10-year average. Fundamentals continue to outpace valuation, keeping Technology as our highest-conviction overweight.
- The macro backdrop is constructive for both Materials and Industrials, but the valuation profiles differ materially. Materials benefit from stronger domestic metals pricing and tariff-related supply tightness, although the gains remain concentrated in metals rather than chemicals. For now, Materials continue to trade close to fair value. Industrials remain supported by exposure to AI infrastructure, electrification, automation and reshoring. However, the sector is trading at a materially richer valuation despite a modest forward earnings growth of 9% (Chart 3).
- Consumer discretionary and communication services show the most disconnected earnings-to-valuation profiles on the screen. Discretionary trades at the richest 12-month forward multiple across the sectors, despite a 9.2% EPS decline and cash flow contracting over 30%. Similarly, communication services sector pairs the steepest earnings decline of 12.9%, with a valuation that is still trading at a premium relative to 10-year history (Chart 3).
For the portfolio, we are making the following changes:
- Tech: Our position has changed from neutral to overweight.
- Financials: Our position has changed from overweight to neutral. We are trimming our weight relative to last month.
- Communication Services: Our position is underweight. We are trimming our weight relative to last month.
- Industrials: Our position is still neutral, but weight is slightly higher than last month.
- Energy: Our position is neutral. We are adding weight relative to last month to be in line with the index.
- Materials: Our position is still overweight, but weight is higher than last month.
- Utilities: Our position is still neutral, but weight is slightly lower than last month.
Sectors in focus:
Utilities (BMO SPDR Utilities Select Sector Index ETF – ZXLU)
Health Care (BMO SPDR Health Care Select Sector Index ETF – ZXLV)
Staples (BMO SPDR Consumer Staples Select Sector Index ETF - ZXLP)
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 –Forward CFO Growth – Next 12m
Chart 3 – Earnings and Valuation
Chart 4 – BMO Sector Model Portfolio Performance in 2026
| Year-to-date | 1-Month | 3-Month | 6-Month | Since Inception | Inception Date | |
BMO Model Sector Portfolio (%) | 14.66% | 2.14% | 3.15% | 15.38% | 14.66% | 12/31/2025 |
Source: Bloomberg, BMO Global Asset Management. As of August 31, 2026.
Chart 5 – BMO Sector ETF Portfolio for September 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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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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