S&P 500 Sectors: Haves Versus the Have-Nots

How reliable is past performance in investing? 

Not very reliable. I know that sounds like blasphemy, but that is only because we are living through a part of the stock market cycle where “the rich get richer.” That is, what just did well is what many investors decide will do well. 

That leads to buying pressure, and since so much money is in index funds, particularly S&P 500 index funds, the higher-weighted sectors tend to benefit from that. 

Ironically, it is a combination of two very different types of investors that have driven some sectors up more than 20% in 2024, while others have performed relatively poorly. One group is the professional, big money momentum traders, including hedge funds. 

To use a volleyball term, they have set the ball up in the air, so that that other group, newer investors who took to trading during the pandemic, and continue to speculate on markets, get to spike the ball over the net and win the point. That’s because the big money has the ability to move markets and get parts of it trending, which creates potential opportunities for less experienced but opportunistic investors to pile on and make money.  

ETFs have been at the center of this, and the astronomical asset growth and volumes in ETFs like the SPDR S&P 500 ETF Trust (SPY), the Invesco QQQ Trust (QQQ) and the iShares 20+ Year Treasury Bond ETF (TLT) resulted partly from rapid interest in trading them from those two factions. 

S&P 500 Sector Winners, Losers 

That brings us to the past performance question in a more granular way–specifically, the performance of the 11 ETFs known as the “SPDR Sector Spiders.” Each represents one of the S&P 500’s 11 sectors. Put them together and you have the S&P 500. However, as so-called sector rotation investors know, there have been some significant differences in performance between them. 

This separation of the haves (strong performing sectors) and the have-nots (relatively weaker performing sectors) is particularly visible when we look at returns over the past three years. 

Energy ETFs: Hot Trend or Old News? 

The anomaly is energy, up 28% a year over the past three years, although most of that came in a tight time frame. The three-year annualized leaders are technology at 12.3%, and industrials and financials at 9.6% and 8.0%, respectively.  

But contrarian investors who believe the artificial intelligence hype and other recent bullish narratives have gone too far can gaze at the other end of that three-year returns list and find that some S&P 500 sectors have not exactly had bull markets. Those include REITs, which managed only 0.5% a year including their above-average dividend yields, consumer discretionary at only 1.5% a year, and communications, which gained only 1.7% a year. 

In Investing, Past Is Not Always Prologue 

However, the in-between types might be the ones with the most near-term momentum. Those include healthcare and consumer staples, which each netted about 7% annualized return the past three years but have rallied strongly since the S&P 500’s last peak on July 16. 

Let’s see what happens to these strong and weak performers within the U.S. stock market going forward. If this era plays out like some in the past, we might see those performance tables flipped upside down in a year or so.