Research.LeutholdGroup

Regional Banks were sold from the Leuthold Select Industries Portfolio as challenges in lending and commercial real estate exposure weighed on the group. The portfolio remains overweight in Communication Services and Financials, while exposure to Consumer Staples, Energy, and Real Estate is zero. Despite recent volatility, Attractive-ranked groups continue to offer a diversified mix and are outperforming year-to-date.

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The strategy holds equity groups that participate when the market moves higher, as well as industries that are more defensive and well insulated from tariffs. 

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The Select Industries portfolio is shifting defensively in response to evolving Group Selection Scores, exiting Homebuilding and Interactive Media while adding to more stable industries like Data Processing, Education Services, and Gas Utilities. April’s volatility also drove a broader rotation across the GS framework, with cyclicals like Airlines and Internet Services making way for more resilient Health Care and Reinsurance names. While Financials still offer upside if uncertainty fades, rising tariff risks have pushed several Consumer and Tech groups into the Unattractive category.

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The strategy sold Airlines and Apparel Retail and put the proceeds into a defensive basket consisting of Data Processing & Outsourced Services and Gas Utilities.

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The strategy initiated new group holdings in Airlines and Education Services, while liquidating Construction & Farm Machinery & Heavy Trucks, Reinsurance, and our DOGI theme (Department of Government Inefficiency). 

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There were two new group positions this month: Internet Services & Infrastructure and Hotels & Leisure. Trading Companies & Distributors was sold.

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After several reductions to the IT sector, Communications Equipment was purchased as a new group holding in the Select Industries equity portfolio.

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Over the entire history of this study, the momentum plays of our “Dreams” and “Nightmares” have worked both ways. Like everything else, our Dreams fell short of the Cap Weighted S&P 500 in 2024. However, the spread of Dreams over the Nightmares was fairly impressive.

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Financials had another boost as the sector should thrive under the new administration. Among others, less regulatory oversight and weaker capital controls are apt to improve profitability. Within Info Tech, several industries that contain top AI-beneficiaries have deteriorated; both Semiconductors and Tech Hardware Storage & Peripherals are now rated Unattractive.

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The portfolio is positioned with a slightly pro-cyclical stance, but also owns defensive and growth-oriented groups that are deemed attractive by the Group Selection (GS) Scores.

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Due to a falloff in our sector rankings, exposure to IT in our equity portfolio has dropped sharply over the past year. Elevated valuations, combined with poor relative strength, overbought signals, and slowing growth are the primary impetus for the declining scores.

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While the IT sector and its group constituents have fallen from the upper echelons of the GS Scores, the  majority of the underlying industries sit in the middle range (Neutral) of the ratings. This isn’t a negative call toward the IT sector, but a shift away from the high-conviction outlook we previously held. 

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Financials is now the top sector weight in our Select Industries portfolio, with impressive valuations, growth, and relative strength driving industries within the sector up the ranks of the Group Selection (GS) Scores.

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The portfolio trimmed exposure to Information Technology in July, with the Financials sector being the main beneficiary of the sales proceeds. 

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The portfolio continues to maintain exposure to growth, cyclicals, and defensives, with a slight preference for rising interest rates and positive performance. 

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While we have lightened Info Tech holdings, the portfolio continues to be positioned with exposure to both the big growers and economically sensitive cyclicals.

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After accumulating and maintaining heavy exposure to Information Technology since early 2023, Select Industries trimmed the weight in the sector by selling Internet Services & Infrastructure. 

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In a market that is less than ideal for an all-cap strategy, Select Industries has had success by investing in several key themes: mega-cap growth, housing/construction, and IT supply-chain beneficiaries. 

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Select Industries looks much different than it did one year ago, with exposure to growth-oriented groups increasing, while commodity- and defensive holdings have been declining. This shift benefited performance throughout the last twelve months. 

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Select Industries has been successful at finding leading industry groups outside the handful of stocks driving the S&P 500 over the last year. Homebuilding, Semiconductor Equipment, and Trading Companies & Distributors have all been key contributors to the strategy.

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