A stock index is generally comprised of various scrips representing different sectors of the economy. Sectoral analysis helps us to identify which section of the economy is expanding or contracting and the reason for stock/market volatility. The sector is a large section of an economy, whereas industry is more specific business activities, i.e. a sector comprises various related industries. As an example, financial is a sector, while banks and insurance companies are industries under the financial sector. An analyst, trader, or investor generally analyzes sectoral prospects before zeroing on a specific industry or stock within that sector.
The broader U.S. index S&P-500 (SPX-500) consists of 500 scrips (shares) from 11-sectors of the economy: communication services, consumer discretionary, consumer staples, energy, financials, healthcare, industrials, materials, real estate, technology, and utilities. For the sake of regulation, an analyst often publicly discusses the prospect of the overall market, sector or even industry, rather than specific stocks. Some sectors are cyclical or defensive. Sectors are broadly divided into essential and non-essential (discretionary) goods and services.
The communication services sector provides both essential and non-essential digital services. The sector is comprised of companies and industries involving telecom, social and interactive media, TV/cable/satellite channels, broadcasters, streaming, movies and entertainment, advertising, publishing, wireless communications, and digital companies. Alphabet (Google parent company), AT&T, Comcast, Discovery, Dish Network, Facebook, Fox, Netflix, T-Mobile, Twitter, Verizon, Viacom, and Walt Disney are some of the bigger names included.
The sector provides non-essential goods and services involving discretionary spending by consumers when they have some excess money at their disposal to spend. This sector is cyclical and has good prospects during boom time. The consumer discretionary sector consists of consumer durable goods, costly/high-end apparel/dress materials, leisure and entertainment, travel and tourism and automobiles.
Some of the blue-chip companies under consumer discretionary include Amazon, eBay (online retail), Advance Auto Parts (automotive retail/automobile parts), Best Buy (computer and electronics retail), Caesars Entertainment (Casinos and gaming), Carnival Corporation, Marriott International (hotel, resorts and cruise lines/travel and tourism), Chipotle Mexican Grill, Domino’s Pizza, McDonald’s, Starbucks (Restaurants/QSR-Quick Service Restaurant), D.R. Horton (homebuilding), Dollar General, Dollar Tree, Target (General Merchandise Stores), Ford, GM, Tesla (automobile manufacturers), Gap (apparel retail), Hanesbrands, L Brands, Nike (apparel, accessories and luxury goods), Home Depot, Lowe’s (home improvement retail), and Whirlpool (household appliances/consumer durables).
This sector primarily consists of essential products like medicines, foods, staples and beverages including alcohol, household/grocery items, hygiene/personal products, agri, and tobacco. Consumer staples are non-cyclical; being essential, consumers have no choice but to continue to spend, even in a recession, and thus the sector may be termed as defensive, or recession-proof. Generally, smart money moves from cyclical/risky to such a defensive sector in times of market turbulence (like COVID disruptions). This sector may be termed as a “Goldilocks sector” (not too hot or too cold) and provide consistent steady growth/return and dividends.
Some of the big companies under consumer staples include Coca-Cola, Colgate, Kellogg’s, Kraft Heinz, Kroger, PepsiCo, P&G, Tyson Foods, Walmart, Walgreens Boots Alliance and Philip Morris.
The sector deals with oil & gas exploration, refining, and marketing, power utility including RE (renewable energy) activities. The stocks are energy-producing or supplying companies including non-renewable fossil fuels (coal, crude oil, petroleum products, NG, gasoline, diesel, and heating oil) or renewables (electric, solar, wind, biofuels/ethanol). Nuclear power falls under non-renewable energy.
Generally in times of high economic growth and activities energy stocks tend to perform well due to higher demand/price of energy (oil, electric, coal, etc.). The opposite is also true. As an example, oil went into the negative price -$40 (theoretically) during COVID peak in April 2020 (during the global lockdown), but subsequently scaled almost $77 in June 2021 as the global economy reopened after COVID lockdown (higher economic growth due to pent-up demand and a deluge of monetary/fiscal stimulus); i.e. the energy sector is primarily a reflation play.
Some of the blue-chip stocks in the energy sector include Chevron, BP, ExxonMobil, ConocoPhillips and Baker Hughes (oil and gas equipment and services).
This sector consists of companies that provide various essential/non-essential financial services such as normal banking, lending, insurance, investment/brokerages/CFD trading providers (capital market), and real estate to both business (commercial) and households (retail). The financial sector is the backbone of an economy and preserving financial stability is now a primary task of any central bank such as the Fed (along with maximum employment and price stability). The financial sector carries a significant weight of any benchmark index.
Some of the blue-chip names include American Express, AIG, Bank of America (BOA), Berkshire Hathway, BlackRock, Citigroup, Goldman Sachs (GS), JPMorgan Chase (JPM), Moody’s, Nasdaq, S&P Global, and Wells Fargo (WFC).
This sector provides essential medical services, medical insurance, manufacturing and distribution of medical equipment and drugs/medicines/OTC products; i.e. medical-related goods and services. The healthcare sector may also be classified as essential and recession-proof. Thus, like consumer staples, the healthcare sector is also defensive (a “safe-haven” sector).
Some of the big names include Abbott Labs, Biogen, Baxter International, Becton Dickson, Johnson & Johnson, Eli Lily, Merck & Co, Moderna, Pfizer, Regeneron, and United Health.
The industrial sector produces capital goods/machinery for use in manufacturing, commodity resource extraction and construction. The industrial sector deals with aerospace, defense, industrial machinery and tools, building materials (cement, metal, lumber etc.), construction, and waste management companies. This is a cyclical sector that moves in line with economic boom/bust and has significant weight in the Dow Jones Industrial Average (DJ-30).
Some of the blue chips include 3M, Caterpillar, Boeing, and United Airlines.
Materials or Basic Materials is a sector involving in raw material discovery, development, and processing such as metal and mining, and chemical and forestry products mainly used in construction. This is also a cyclical sector, generally flourishing during an economic boom cycle (reflation), while nosediving during bust times (recession).
Some of the big names include Dow, DuPont, Newmont (Gold), and Nucor (steel).
The sector involves development and transactions (buying/selling) of residential (homes), commercial (shopping malls, retail shops, offices, hotels, hospitals, etc.) and properties as well as industrials (factories/plants, warehouses. It’s also a cyclical sector.
Some of the big names include American Tower, CBRE, and Equinix.
This sector mainly involves IT (information technology) related goods and services (essential/non-essential) such as computer and mobile software, hardware, artificial intelligence (AI), machine learning and R&D (innovation). The technology sector generally offers attractive growth opportunities, especially the startups.
Some of the big names include Accenture, AMD, Apple, Broadcom, Cisco, HP, Intel, IBM, Intuit, Mastercard, Micron, Microsoft, Nvidia, Oracle, PayPal, Qualcomm, Visa, Western Digital and Zoom. Tech is a part of post-COVID ‘K’-shaped economic recovery amid digital/WFH theme (COVID lockdown). But the sector may continue to flourish even after COVID, as digital adaptation improves productivity. This sector has significant weight, not only in the tech-savvy Nasdaq but also in the Dow Jones and S&P.
This sector provides basic/essential utility services (amenities) such as electricity, water, sewage, and NG to bigger things like dams. Being essential, the sector is heavily regulated, but provides steady growth even in recession times and good dividend-paying. It’s a defensive sector and also a proxy of lower bond yields.
Some of the big names include American Electric Power, CMS Energy, and PG&E.