Weekly ETF Brief

Political and Economic Unknowns Drive Equity Sector Shifts

We are seeing increased interest in sector performance as a result of the implications of policies of the main two political parties five weeks out from the US presidential election; and due to a rotation of equity sectors, amid rising concern about the importance of Information Technology to portfolios.

2 octobre 2024 Temps de lecture: 2 min

Rebecca Chesworth

Senior Equity Strategist

Tech Equities Rotate Out of Favour

The defensive rotation started back in July. As we wrote in our Q3 Sector & Equity Compass, the intense focus on IT was no longer merited, given an improving earnings cycle for other sectors and the growing difference in valuations between tech stocks and the rest. During Q3 US Technology (as measured by S&P 500 Information Technology Index) has risen by just 1% — with increasing volatility, whilst the broad S&P 500 has returned over 5%. Given that IT accounts for 33% of the S&P 500, it is impressive how the latter has still achieved record highs. Other sectors have taken up baton — particularly the defensives, led by Utilities, up over 15% in Q3.

SPDR’s Sector Momentum Map can be a valuable tool when considering sector rotations. Powered by RRG® Research, the Sector ETF Momentum Map shows in real time how sectors are trending relative to their US, European and world benchmarks, and to other sectors.

We see continued strength in Utilities in the leading quadrant along with other defensives, Consumer Staples and Health Care, as well as Real Estate. For those looking for improving momentum that isn’t yet reflected in relative strength Financials and Industrials, have recently reached new all-time highs.

Broadening Out From Technology

Tech is a significant part of the market and of investors’ equity portfolios, accounting for 32% of the market capitalisation weight of the S&P 500 Index. Its sector performance has been unrivalled by any other sector in developed markets for the last ten years. The rapid pace of technological change has produced positive earnings surprises and improving earnings sentiment from IT companies. However, there are now questions about valuation, tighter regulation and returns from AI investment that make the sector vulnerable. Given the significant concentration, we believe that investors would be best considering a strategy where they can reduce the risk of their large IT holdings. This is explored in a recent paper: Broadening Out From Tech.

Impact of the US Election

Looking at the performance of US equities in earlier cycles, it is difficult to see a consistent impact of election timing or the party in the White House. We find the economy matters more. Given their economic sensitivities, we prefer to look at sectors as means of assessing the importance of the election. Of the eleven sectors, we believe Energy is most in contention in this campaign, suggesting heightened volatility and providing an opportunity for investors looking for divergence. Utilities and Health Care could also move on the outcome, depending on environmental legislations, healthcare policy, etc. We believe Technology could be impacted by new regulations and its products may be targeted in any trade war. For more on this please see US Elections Finish Line in Sight: Revisiting our Outlook.

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