Strategic Sector Selector: Shifting to cyclical
The strong returns on global equities during Q3 2025 seemingly ignored rising concerns around US growth. However, market leadership stayed narrow with technology and automobiles & parts leading equities higher partly driven by a repricing of US rates. I think the probability of global recession remains a tail risk, although a reacceleration could imply stickier inflation than previously assumed (especially if the impact of tariffs on the US economy spills over into 2026). I think there may be some consolidation after such a strong run, but I see upside in the next 12 months as the global economy moves towards trend growth. With that in mind, I think it is time to reduce the allocation to defensive sectors slightly by downgrading utilities to Neutral. At the same time, I maintain the exposure to cyclicals, but downgrade sectors where valuations may have priced in higher growth and Fed easing, such as technology and basic resources, and upgrade travel & leisure and financial services that have more potential to benefit from improving fundamentals.
Changes in our Model Sector Allocations:
- Upgrades: travel & leisure (UW to OW), financial services (UW to N)
- Downgrades: basic resources, technology (N to UW), utilities (OW to N)
| Most favoured | Least favoured |
| US banks | US media |
| US energy | European telecommunications |
Sectors where we expect the best returns:
- Banks: steepening yield curve, attractive valuations, exposure to potential financial deregulation
- Energy: attractive valuations, exposure to reaccelerating economic growth, improving earnings momentum
- Healthcare: attractive valuations, exposure to growth factor, tariffs impact may be priced in
Notes: Data as of 30 September 2025. 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.
