The October 2025 edition of the S&P 500 equity sector rotation chartbook can be found here. You can read more about the methodology and underlying assets here. Additionally, September's edition can be found here.
 

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Equity investors are currently in the enviable position of having their cake and eating it too. What if I told you that you could outperform the S&P 500 by investing in market-leading U.S. technology firms—and enhance that outperformance further by adding non-U.S. equities? Sounds too good to be true? Well, yes and no.

The chart below shows that U.S. tech (XLK) and FTSE non-U.S. all shares (VEU) are doing the heavy lifting, as the only two components delivering both excess returns relative to the SPX and accelerating momentum. Communication services (XLC) also shows excess returns but with decelerating momentum, though it broadly captures similar exposure to XLK. This outperformance is occurring against a backdrop of solid overall equity performance.

As of the end of October, the IVV ETF was posting a trailing annual total return of 22%—a strong showing, though not exceptional. Previous peaks in my sample have approached 40%, excluding the nearly 80% surge from the depths of the initial COVID plunge.

The return of VEU to the top-right quadrant gives the impression of a broadening base for the global equity rally. However, a closer look reveals that it’s still largely an AI-driven story.

VEU’s largest constituents include Taiwan Semiconductor Manufacturing and ASML Holding, both pure AI plays, along with Samsung and SAP SE, which are at least partially driven by the same themes. Tencent and Alibaba also appear among the top 10 holdings, names that have recently benefited from a broader rotation into emerging market equities as a standalone factor.
 

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I ran through my thoughts on whether AI is a bubble last month, and will simply repeat one key point: a market with narrow leadership isn’t necessarily an unhealthy market. In fact, recent history suggests that it’s precisely when leadership narrows—typically driven by technology stocks—that the market tends to deliver its strongest returns.

That said, a market with narrow leadership is inherently riskier. Holding the proverbial global market portfolio today exposes investors to significantly more idiosyncratic equity and thematic risk than many may realize—or would willingly accept if they did.

How can investors mitigate such risks?

One approach, as I attempt to outline here, is to accept some underperformance by allocating to non-growth and non-momentum sectors, with the expectation that these areas will act as diversifiers—negatively correlated when the broader, narrower market rolls over.

In that context, the framework above currently points to opportunities in at least two traditional defensive sectors: Consumer staples (XLP) and healthcare (XLV), both of which have significantly underperformed in recent months. I’m less inclined to include utilities in this bucket, given that the sector has performed relatively well—thanks in part to its indirect exposure to AI through the rising energy demands associated with the technology.

Elsewhere, real estate (XLRE) still appears undervalued as a potential play on an aggressive Fed easing cycle—if that’s the path you believe we’re heading toward. Materials (XLB) also look relatively weak, though this sector is heavily exposed to single-name risk, with the top ten holdings making up well over 50% of the portfolio.

Energy (XLE), meanwhile, is firmly back in the doghouse—slipping into the lower-left quadrant—after a brief attempt to carve out some outperformance in September. Finally, industrials (XLI) and financials (XLF) have also lost ground over the past month in relative terms.

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