Health Care and Communication Services upgrades to overweight
Since October, when investor curiosity about Health Care became apparent, this sector has been highlighted as a preferred defensive. Today, Health Care offers reasonable valuations on quant models alongside strong earnings per share that benefit from a weaker dollar and robust revenue revisions. The sector also boasts positive fund flows and a constructive performance outlook from analysts, with favorable assessments of both valuation and demand.
Communication Services was favored heading into 2025 but was downgraded in July following a cautious turn in the mid-year analyst survey. December's updated survey showed a meaningful shift: analysts' views have improved, with a constructive performance outlook, neutral valuation views, and strong demand assessment. Beyond the survey, Communication Services shares similarities with Health Care. The sector shows positive earnings and revenue revisions, attractive valuations, and flows beginning to recover after recent weakness. Both sectors also tend to outperform when consumer sentiment improves—a metric that has been weak but may be stabilizing near extreme lows.
Financials and Materials remain overweight
Financials and Materials maintain their overweight positions after solid outperformance since late October while retaining attractive or reasonable valuations on quant work. Both sectors carry constructive performance outlooks from analysts and would benefit from improving business sentiment or rising ISM manufacturing, currently stuck in weak territory.
Financials continues to enjoy one of the most constructive policy backdrops and tends to outperform when consumer sentiment rises. A weakness for Financials is recently deteriorated fund flows. Materials faces negative upward earnings estimate revisions, though trends appear stabilizing. The sector benefits from a weaker US dollar. After strong gains, flows turned negative recently but now appear to be rebounding.
Looking ahead to 2026
Our global analysts hold a constructive view on performance, valuation, demand, and the domestic policy backdrop heading into 2026. Notably stronger optimism appears among US and Canadian analysts compared to their Europe and Australia counterparts, suggesting regional divergence in opportunity and risk.
