At first, when you start analyzing stocks it can be very daunting when you see that you can buy over 8000 different stocks and many index funds. It can be hard to separate or compare stocks with each other without stock market sectors.
What is Stock Market Sectors?
Stock market sectors are called Global Industry Classification Standard (GICS). It was created by Standard & Poor‘s (S&P) and Morgan Stanley Capital International. This classification helps analyze businesses by their main activity in the market.
Stock Market Sectors classification helps both individual and professional investors to build their portfolios in a diversified manner.
For any investors, it is a good idea to own stocks from every of the stock market sectors. Of course, if you are just starting out it can be a lot easier to purchase an index fund that helps you manage the risks.
I recommend reading more about it in my article about Index Funds.
S&P 500 Stock Market Sectors
When talking about stock market sectors it is easier to understand them by analyzing the biggest companies. That can be done by looking up the ones that belong to the S&P 500 index fund.
From the table below you can see that 3 sectors dominate this index fund thus these companies are the largest in the US. Those companies belong to the technology, healthcare, and financial services sectors.
The technology sector is cyclical, meaning it performs best when the overall market is growing. Whereas healthcare and financial services sectors are more conservative sectors that usually perform well even when the market faces a downturn compared to other sectors.
As with any investment portfolio S&P 500 index fund is a good example of a diversified portfolio where it has some good companies that grow in good years and the ones that prevent you from devastating losses in the down years.
A very important aspect of stock market sectors is determining whether they are overvalued or not at the moment. In the table below you can see that by 10 years of data everything that is above 100% is overvalued and below that everything is undervalued.
Of course, this is not conclusive, but it is a good indicator. Moreover, stock market sectors can be very large so some companies in it can be overvalued and others can be undervalued.
1. Technology Sector
The technology sector is the biggest one. In this sector, you can find companies that are developing technological items or services, everything that is related to computers, microprocessors, and operating systems.
Companies in the technology sector are highly competitive and are driven to make innovations to stay in their positions. When the market is growing these companies make huge plans, make new stuff, and try to sell them as fast as possible, however, as soon as the crisis hits these companies fall the most and cut back on new innovations during the recession period.
You can already see that Apple and Google are letting people go and are cutting back on new innovations.
Overall the market cap is 12.19T USD, there are a total of 792 being traded globally, and there are 71 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 376.33% over the past 10 years (37.63% average annual return).
- Typically cyclical – most companies do better when the market is rising and falls hard when a recession hits.
- Performs better when the economy is growing
- Growth companies – most companies are still small and usually can get you very high returns.
- High P/E ratio – Compared to other sectors it is ridiculously high because of people’s expectations.
The biggest companies are Apple Inc. (AAPL), Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA), Broadcom Inc. (AVGO), and Cisco Systems Inc. (CSCO).
2. Healthcare Sector
The healthcare sector is the second largest. It consists of companies that supply medical items, pharmaceutical companies, and scientific-based companies.
Companies from this sector in the US get support from the government as there is a huge demand for it from the Baby Boomer generation.
Companies that produce medicine, and medical appliances usually have a good moat (Read an article about Investment Checklist by ‘Invested’ to understand it better), so typically they can do better when the market is going down than companies from other sectors.
Overall the market cap is 7.85T USD, there are a total of 1309 being traded globally, and there are 66 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 218.07% over the past 10 years (21.81% average annual return).
- Non-cyclical – healthcare sector is considered crucial and both people and the US government spend money on it regardless of the market situation.
- Hard entry – Every drug requires several years to be developed and after that, they are protected by patents.
- Economy of scale – big companies can buy needed materials at lower costs because of their buying power.
- Research and development – it requires a lot of money in the first place to start a company in this sector.
The biggest companies are UnitedHealth Group Incorporated (UNH), Johnson & Johnson (JNJ), Eli Lilly and Company (LLY), Merck & Co. Inc. (MRK), and AbbVie Inc. (ABBV).
3. Financial Services Sector
Financial companies are considered the ones that work with finance, investing, and the ones that store or move money.
This sector is the pillar of the world’s economy as it controls how money is flowing. When this sector is strong it can drive high growth in the market whereas a weak sector can be a cause of a market crisis.
When unemployment rises, consumers lower their spending. Because of that central banks lower interest rates and encourage spending for the market to get back up.
Currently, banks are doing the exact opposite and are increasing interest rates and with that, they are trying to stop spending as the market is highly overvalued. Thus they are trying to prevent probably the biggest market crash in history.
Overall the market cap is 8.23T USD, there are a total of 3594 being traded globally, and there are 70 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 153.51% over the past 10 years (15.35% average annual return).
- Credit card companies may shrink during recessions
- Mortgage companies may benefit from low-interest rates
- Overall relatively stable
The biggest companies are Berkshire Hathaway Inc. Class B (BRK.B), JPMorgan Chase & Co. (JPM), Visa Inc. Class A (V), Mastercard Incorporated Class A (MA), and Bank of America Corp (BAC).
4. Consumer Cyclical Sector
You can think about the consumer cyclical sector as companies that sell luxury items or services. Companies in this sector perform best in growing markets as people are willing to spend more money on things that are for pleasure rather than necessity.
How many subscriptions to streaming services do you currently have? If it is more than one it is good to tell that we have money to spend right now and the consumer cyclical sector is booming. However, once people start to think about where their money is going this sector will be one of the first to lose its value.
In general, this sector together with the technology sector does well when the market is growing and crashes hard when we face a crisis.
Overall the market cap is 6.86T USD, there are a total of 579 being traded globally, and there are 58 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 172.23% over the past 10 years (17.22% average annual return).
- Cyclical companies – like other cyclical companies this sector can yield the highest returns when the market is rising and it falls the most of all when the market is crashing.
The biggest companies are Amazon.com Inc. (AMZN), Tesla Inc (TSLA), Home Depot Inc. (HD), McDonald’s Corporation (MCD), and NIKE Inc. Class B (NKE).
5. Industrials Sector
The industrial sector is quite wide as there are airline, railroad, and even military weapons manufacturing companies.
Companies that belong to this category mainly produce goods used in manufacturing, resource extraction, and construction.
Overall the market cap is 5.42T USD, there are a total of 649 being traded globally, and there are 71 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 146.17% over the past 10 years (14.62% average annual return).
- Cyclical companies – these companies do better when the market is rising overall.
The biggest companies are Raytheon Technologies Corporation (RTX), Honeywell International Inc. (HON), Caterpillar Inc. (CAT), Union Pacific Corporation (UNP), and United Parcel Service Inc. Class B (UPS).
6. Communication Services Sector
In this sector, companies try to keep people connected. These companies are internet providers, cell service providers, media, entertainment, and so on.
In short, these companies transmit words in voice, words, audio, or video. The biggest problem for this sector is keeping up with people’s need for faster data connectivity and better quality overall.
Overall the market cap is 4.19T USD, there are a total of 289 being traded globally, and there are 25 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 16.99% over the past 10 years (1.7% average annual return).
- Depending on the company can be defensive or cyclical – you have to go deeper and analyze all the companies in this sector to find the ones that can contain their growth even in down years.
- Overall a sector that has everything – you can find defensive, cyclical, and growth companies in this sector.
The biggest companies are Alphabet Inc. Class A (GOOGL), Alphabet Inc. Class C (GOOG), Meta Platforms Inc. Class A (META), Walt Disney Company (DIS), and Verizon Communications Inc. (VZ).
7. Consumer Defensive Sector
These are the essential companies that provide us with our everyday items like food, beverages, household, and personal items.
Consumer defensive companies have an advantage in crisis years as consumers are not willing to cut on their essential needs. Tabaco companies can also be found in this category.
Overall the market cap is 4.16T USD, there are a total of 248 being traded globally, and there are 36 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 102.44% over the past 10 years (10.24% average annual return).
- Does better in crisis situations – when inflation occurs these companies can simply increase their prices without losing customers.
- Outperforms S&P 500 index fund in down years
- Dividends – a lot of companies pay out dividends
- Slow growth – there is no stimulus for this sector to achieve significant growth like in other sectors.
The biggest companies are Procter & Gamble Company (PG), PepsiCo Inc. (PEP), Coca-Cola Company (KO), Costco Wholesale Corporation (COST), and Walmart Inc. (WMT).
8. Energy Sector
Energy sectors consist of companies that provide oil, gas, and other kinds of fuel, as well as companies that gather these materials. This also includes renewable energy.
In 2021 the US promised 550B USD in investments in the energy industry which will stimulate its growth in the next few years.
Overall the market cap is 3.75T USD, there are a total of 265 being traded globally, and there are 23 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 21.65% over the past 10 years (2.17% average annual return).
- Sensitive to economic changes – demand is dependent on the overall market and political events.
- Sensitive to supply-demand trends – when oil and gas prices rise this sector earns more and vice versa.
The biggest companies are Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), ConocoPhillips (COP), Schlumberger NV (SLB), and EOG Resources Inc. (EOG).
9. Utilities Sector
Utility companies similar to the consumer Defensive sector provide us with necessary stuff for homes and offices like electricity, water, and gas.
On economic downturns, Utilities sectors perform well as when everything is crashing this sector still generates returns as usual.
Overall the market cap is 1.62T USD, there are a total of 114 being traded globally, and there are 30 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 96.26% over the past 10 years (9.63% average annual return).
- Crisis proof – utilities are essential for well-being, so these companies can raise prices when they have more expenses and customers will still use their services.
- Pays dividends – as most companies are already established and do not produce high growth they tend to pay out dividends
- Low returns – with high-interest rates it can be more profitable to choose bonds as their prices might get you better returns.
- Regulated by the government – these companies are usually controlled or regulated and cannot produce high returns.
The biggest companies are NextEra Energy Inc. (NEE), Duke Energy Corporation (DUK), Southern Company (SO), Dominion Energy Inc (D), and Sempra Energy (SER).
10. Real Estate Sector
This sector is quite new. You can find companies that pay as high as 90% of their profits as dividends.
The real estate sector includes companies that work in residential, commercial, industrial, raw land, and special use categories. Purchasing land or property is also calculated as real estate sector investment, as well as investing via REIT.
Overall the market cap is 1.45T USD, there are a total of 270 being traded globally, and there are 31 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 25.42% over the past 5 years (5.08% average annual return).
- Does not correlate with stocks – this sector is only affected when companies are not willing to put money into expanding. Naturally when the market is booming this sector grows faster.
- Usually pays dividends – some of the companies are well established and do not expect to grow as fast. They try to attract investors with dividends.
- Considered safe – in general real estate is regarded as a safe investment that is constantly gaining in value. Historically there were very few crises when this market experienced a downturn.
The biggest companies are Prologis Inc. (PLD), American Tower Corporation (AMT), Equinix Inc. (EQIX), Crown Castle Inc. (CCI), and Public Storage (PSA).
11. Basic Materials Sector
Basic materials sectors provide the raw materials for other sectors to function like gold, zinc, copper, and wood.
Materials gathered and processed in this sector are used in pretty much every other sector.
Overall the market cap is 2.54T USD, there are a total of 256 being traded globally, and there are 22 companies in the S&P 500 index fund.
S&P 500 companies in this sector grew a total of 108.54% over the past 10 years (10.85% average annual return).
- Performs best when the market is growing – basic materials are mostly needed when the market is growing. Because of that companies in this sector are also considered cyclical.
The biggest companies are Linde plc (LIN), Air Products and Chemicals Inc. (APD), Freeport-McMoRan Inc. (FCX), Sherwin-Williams Company (SHW), and Corteva Inc (CTVA).
Conclusion
- There are 11 investing sectors
- Cyclical stocks are: Technology, Consumer Cyclical, Industrials, Basic Materials, Communication Services, Energy
- Defensive stocks are: Healthcare, Financial Services, Consumer Defensive, Utilities, Real estate
- Over the last 10 years technology (376.33%) and healthcare (218.07%) sectors grew the most.
- You should always diversify your portfolio!
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