We have added to our U.S. Financials equity sector allocation in the Global Balanced portfolio, offset by a reduction in our U.S. Health Care equity sector overweight. This swap increased the Financials Sector target allocation from 5% to 10% of the portfolio’s U.S. large-cap equity allocation, and reduced the Health Care Sector target allocation from 35% to 30% of the portfolio’s U.S. large-cap equity allocation.
The increase in U.S. Financials Sector exposure reflects, in part, our outlook for continued moderate economic growth and interest rate normalization, as well as increased confidence that financial regulatory reform will be a priority for the Trump administration. Given our outlook for an extended period of moderate economic growth, we thought it was appropriate to modestly increase the economic sensitivity of the portfolio by adding to Financials and reducing Health Care slightly.
We believe that both Financials and Health Care will deliver strong relative earnings growth in the economic environment we see ahead, but, on the margin, we see increasing tailwinds for U.S. Financials given our confidence in financial regulatory reform. We also maintain a positive view on the U.S. Health Care sector, but given the sector’s strong performance YTD (second-best performing U.S. sector) and our desire to further increase our Financials Sector allocation, we believed Health Care was an appropriate source of funds for the portfolio shift. We also recognize that there remains uncertainty about the regulatory environment for the Health Care Sector, as illustrated by the recent failure to repeal and replace the Affordable Care Act. Despite this uncertainty, companies in the Health Care Sector continue to be attractively valued given their earnings growth potential, and thus the Health Care Sector remains our largest U.S. sector overweight.