Sean Gross, CFP®, AIF® | Co-Founder & CEO
When thinking about the stock market, many investors naturally gravitate toward an index like the S&P 500. While this is a reasonable starting point, it can be especially valuable to look one level deeper at the individual sectors that make up the index. The 11 sectors of the S&P 500, for example, each carry distinct characteristics and can respond very differently to shifting economic conditions and geopolitical events. Gaining an appreciation for these dynamics plays an important role in portfolio construction, diversification, and long-term financial planning.
In the current environment, the spread between the top and bottom performing sectors has expanded to more than 40 percentage points this year. This notable divergence has been shaped by the ongoing conflict in the Middle East, fluctuations in oil prices, and the rapidly changing narrative surrounding AI.
The S&P 500 also recently experienced its first pullback exceeding 5% from its all-time high, even as 6 of the 11 sectors remain positive on the year. This divergence is possible because the S&P 500 does not assign equal weight to all sectors — Technology currently accounts for nearly one-third of the index, while Energy and Utilities represent just 3.5% and 2.5%, respectively. Of course, while past performance does not guarantee future results, history demonstrates that conditions can shift rapidly and that markets have often recovered when least expected.
Although recent market dynamics have been meaningful, the reality is that sector-level behavior varies every year. A longer-term perspective reveals that many sectors have delivered strong performance over the past several years, frequently surprising investors in the process. This serves as a reminder that maintaining balance across sectors is just as important as diversifying across asset classes. With that in mind, what context is needed to make sense of the recent sector rotation and market pullback?
The energy sector has surged amid geopolitical uncertainty
Geopolitical risks have provided a meaningful tailwind for the energy sector in 2026, with gains of approximately 30% year-to-date. This strong outperformance has been fueled by a sharp increase in oil prices, with Brent crude holding above $100 per barrel in the wake of escalating tensions in the Middle East. As the situation continues to develop, further market volatility remains possible. Nevertheless, this environment has pushed energy stocks considerably higher — a pattern that has historically repeated itself during periods of geopolitical conflict.
A notable example occurred in 2022, when Russia’s invasion of Ukraine propelled the energy sector to a 65.7% gain for the full year, even as the broader S&P 500 declined by 18%. The prior year, energy returned 54.6% as the global economy emerged from the pandemic. While broader markets eventually recovered from these historic episodes, they underscore how energy stocks have historically functioned as a counterbalancing force during periods of global uncertainty.
Although oil prices initially rose this year due to the blockage of the Strait of Hormuz — which compelled many Middle Eastern nations to curtail oil and gas production — more recent developments have seen attacks targeting energy production infrastructure directly. Elevated oil prices benefit producers by increasing revenues and incentivizing further investment and exploration.
At the same time, higher oil prices create headwinds for the broader economy in the near term by increasing costs for consumers, businesses, and many industries. This explains why the same shock that lifts energy stocks can weigh on transportation, consumer spending, and corporate profit margins in other areas of the market.
Taking a longer-term view, there are reasons to temper excessive pessimism about elevated oil prices. Between 2011 and 2014, oil prices sustained levels near $100 per barrel, yet the economy continued to expand and equity markets maintained their upward trajectory. Economists frequently characterize such events as “supply-side shocks” that tend to be temporary in nature, as production is eventually restored and alternative suppliers emerge to fill the gap.
Notably, the U.S. has held its position as the world’s largest oil producer for six consecutive years, with output now surpassing 13.7 million barrels per day. The U.S. is widely regarded as a “swing producer,” meaning that increased domestic production can help offset shortfalls elsewhere. This capacity can help moderate prices over time and reduce the economy’s exposure to disruptions in foreign supply.
AI has raised new questions about technology companies
Over the past several years, AI-driven stocks propelled the market higher, generating substantial gains across sectors including Information Technology, Communication Services, and Consumer Discretionary. The extended outperformance of these sectors — including the so-called Magnificent 7 — has led to increased market concentration and heightened sensitivity to a relatively small group of companies.
More recently, however, the story has evolved. While these companies continue to report strong earnings, a broader range of sectors has performed well over the past year, including Energy, Industrials, Utilities, Materials, and Consumer Staples. Several of these groups are considered more “defensive” in nature and have benefited from the current market environment.
Part of the shifting narrative around technology stocks reflects growing concerns about how AI may affect established software business models. Some observers have referred to this as the “SaaS-pocalypse” — the notion that AI tools could disrupt traditional software-as-a-service (SaaS) companies. This debate remains ongoing, and whether these concerns ultimately prove warranted, they have already contributed to a reassessment of technology sector valuations.
This rotation does not imply that technology stocks have lost their relevance. Rather, it illustrates how swiftly market leadership can change. This is precisely why investors should be cautious about allowing portfolios to become overly concentrated in any single sector, regardless of how compelling the growth outlook may appear at a given moment. Ultimately, the purpose of a portfolio is not to chase the best-performing index, sector, or individual stocks, but to generate sound returns across market cycles in support of long-term financial plans.
Defensive sectors and broader diversification have supported portfolios
As uncertainty increased in recent months, markets gravitated toward traditionally defensive sectors such as Utilities, Consumer Staples, and, to a lesser degree, Health Care. This defensive positioning had already been building before the most recent escalation in the Middle East, suggesting that investors were already adopting a more cautious stance in response to concerns surrounding AI.
Defensive sectors tend to hold up relatively well when uncertainty and market volatility increase. This is not because these companies are suddenly delivering exceptional financial results, but because their cash flows are generally more stable and less reliant on a robust economic cycle. Utilities continue to collect payments, consumers continue to purchase everyday goods, and healthcare remains a necessity regardless of geopolitical events. These sectors also tend to offer above-average dividend yields, on average. This relative predictability is what makes them more appealing when markets begin to express concerns about growth or inflation.
A related concept that has gained traction for describing stocks less exposed to AI disruption is “heavy assets, low obsolescence,” or HALO. These tend to be companies that are defensive in character and rely on physical goods or manufacturing processes that are not easily disrupted by emerging technologies.
Just as with asset classes, predicting which sector will lead or lag in any given year is an exceptionally difficult task. The sector that tops the performance rankings one year frequently finds itself near the bottom the next. Technology’s recent challenges, for instance, follow an extended stretch of market leadership. This inherent unpredictability reinforces why maintaining broad sector exposure is so essential.
A well-diversified portfolio that spans cyclical sectors such as energy, growth-oriented sectors such as technology, and defensive sectors such as utilities and consumer staples is better equipped to navigate a variety of market environments. Rather than attempting to time sector rotations — which is just as counterproductive as trying to time the broader market — investors are better served by holding a balanced portfolio capable of participating in gains across different parts of the economy while managing overall risk.
The bottom line? The S&P 500’s performance this year is a reminder that maintaining balance across sectors is a key principle of long-term investing. Having exposure to many parts of the market is the best way to keep portfolios aligned with financial goals.