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02/17/17 06:12:19 PM

Sector Weighting Change

CFRA lowered its recommendation for the S&P 500 consumer discretionary sector to marketweight from overweight on Wednesday. We maintain overweight recommendations on industrials and materials.

Regarding the consumer discretionary downgrade, CFRA Chief Investment Strategist Sam Stovall projects this interest-sensitive sector will be pressured by the FOMC's desire to raise rates in the year ahead. The sector will also be affected by ongoing weakness in U.S. customer traffic for mall-based retailers and large restaurant chains, negative U.S. dollar currency impacts on auto manufacturers and expected drops in international travel/tourism and luxury goods spending. In addition, Stovall remains concerned about the potential overhang of a border tax adjustment on import-dependent retailers and select leisure products (toys), as well as uncertainties related to broadband/e-commerce and media regulations under the Trump administration. The consumer discretionary sector's EPS is expected to rise only 6.0% in 2017 versus the 10.6% gain projected for the S&P 500. The sector, which makes up 12.2% of the S&P 500, is tracked by an exchange-traded fund, Sector Select Consumer Discretionary ETF (XLY 86 OW).

An expected pickup in infrastructure spending under the new Republican administration underpins the overweight recommendations on industrials and materials. Industrials, which makes up 10.3% of the S&P 500, is tracked by Select Sector Industrials (XLI 66 OW); materials, which comprises 2.9% of the S&P 500, is tracked by Select Sector Materials (XLB 52 OW).

Beth Piskora CFRA Senior Content Director


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