RBC upgrades Materials, cuts Discretionary in sector reshuffle

Investing.com -- RBC Capital Markets reshuffled its U.S. sector recommendations in its mid-year “Global Sector Navigator” report, upgrading Materials to Overweight while cutting Consumer Discretionary to Underweight.

The changes reflect both survey-based sentiment and RBC’s top-down quant analysis.

Materials was one of the standout sectors in RBC’s analyst survey, leading on forward performance expectations and scoring well on valuations.

“Positive EPS revisions and inflows have returned,” RBC strategists said in the report, adding that revisions may benefit further from U.S. dollar weakness.

They also view Materials as “a better alternative to the extremely expensive Industrials sector,” should the trade war de-escalate.

At the same time, Consumer Discretionary was lowered to Underweight, after being among the lowest-ranked sectors in the analyst survey.

The strategists flagged weak sentiment around forward performance, elevated valuations, and negative earnings revisions. Policy concerns also weighed on the outlook.

“This sector had one of the most pessimistic views on forward performance in our survey, and one of the most negative views on the policy backdrop,” the report states.

Other changes include upgrades of REITs and Consumer Staples to Market Weight, and downgrades of Communication Services and Utilities to Market Weight.

RBC notes that REITs are supported by “constructive” performance expectations and improving flows, while Communication Services, despite positive EPS and revenue revisions, now ranks low on analyst sentiment for both performance and valuation.

The updated positioning reflects RBC’s preference to focus only on sectors that present clear conviction.

“It is not lost on us that our list of sector Overweights and Underweights is smaller than usual,” the team wrote. “We have limited those to ones that we see as clear outliers in a positive or negative direction.”

The brokerage expects a continued tug of war between Growth and Value but sees potential for a short-term shift toward Value or broader market leadership.

While no defensive sectors are currently Overweight, the firm views Staples and REITs as preferred defensive plays if market sentiment overheats, citing strong summer seasonals and rising volatility risk.