Strategic Sector Selector: Approaching late cycle?
The mild pull-back in global equities during Q1 2026 was driven by the US-Iran conflict, while AI-related disruption simmered in the background. Market leadership stayed narrow with resource-related sectors and “defensive value” outperforming driven by concerns about higher inflation and lower economic growth. We think the probability of global recession remains low, though no longer a tail risk. A reacceleration in growth could be delayed by higher inflation than previously assumed and commodity supply disruptions. We think there may continue to be volatility in the short term, but we see upside in the next 12 months as the global economy moves towards trend growth. However, with markets displaying a more late-cycle tilt, we shift our model allocation in that direction by switching our preference from chemicals to basic resources and upgrading construction & materials and utilities. We also further reduce our exposure to consumer discretionary by downgrading retailers and travel & leisure to Underweight.
Changes in our Model Sector Allocations:
- Upgrades: basic resources (UW to OW), construction & materials, utilities (N to OW), consumer products & services, technology (UW to N)
- Downgrades: chemicals, travel & leisure (OW to UW), retailers (N to UW), banks (OW to N)
| Most favoured | Least favoured |
| European energy | US media |
| US utilities | European travel & leisure |
Sectors where we expect the best returns:
- Energy: attractive valuations, exposure to reaccelerating economic growth, improving earnings momentum
- Real estate: attractive valuations, exposure to value factor, rental growth could cushion inflation risk
- Utilities: attractive valuations, resilient to higher energy prices, exposure to “defensive value”
Notes: Data as of 31 March 2026. On the horizontal axis, we show how far a sector’s valuation is above/below that implied by our multiple regression model (dividend yield relative to market). The vertical axis shows the perpetual real growth in dividends required to justify current prices relative to that implied for the market. We consider the sectors in the top right quadrant expensive on both measures, and those in the bottom left are considered cheap. See appendices for methodology and disclaimers.
Source: LSEG Datastream and Invesco Strategy & Insights
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
