No matter how vast the index landscape becomes, sectors remain central to the conversation. From TV studios to trading floors, and around the world, the 11 GICS^® sectors are widely recognized and discussed, reflecting their enduring utility as indicators of which way markets and economic winds are blowing. They are also valuable building blocks for tailoring views of the U.S.-domiciled, globally exposed members of the S&P 500^®.

January presented another opportunity for thoughtful tilts, as investors navigated the unexpected following an election-year November and a December marked by high dispersion, making their views known through sector performance. In Exhibit 1, we show January performance of the S&P 500 along with each of its component GICS sectors. January marked the third month in a row that the sector spread (the different between highest- and lowest-performing sectors) reached double digits, at 12.0%. Information Technology was the sole decliner, falling 2.9% largely on the heels of a new entrant in AI upending the competitive landscape and erasing nearly USD 800 billion in market cap from two constituents in a single day.

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Although losses among a handful of mega-cap stocks grabbed the headlines and affected the S&P 500’s performance near the end of the month, looking at Exhibit 1 we can see that 7 out of 11 sector indices actually outperformed the broad benchmark in January, led by Communication Services rising 9.1% after a series of positive earnings reports. Looking more closely, we see that those seven outperformers contain a mix of historically defensive and cyclical sectors.

The simple classification of sectors as cyclical versus defensive is well accepted and discussed in recent research as a function of the observation that certain sectors have tended to perform better or worse depending on whether the market is rising or falling, exhibiting betas above or below one as well as a range of historical volatility. Understanding which sectors have historically outperformed in each phase, a market participant might identify which sectors align with their own economic outlook and change their sector views accordingly. Bucketing sectors into defensive and cyclical based on ranking their risk attributes and their excess returns during rising or falling markets can allow for rational tilts based on highlighting sectors that have historically offered relatively better performance in each environment.

Extending from recent research testing blends of sectors through historical crises, we use the same two approaches below to understand sector performance over the course of January.¹

Cyclical Blend: An equal-weighted combination of five cap-weighted cyclical sectors (Information Technology, Financials, Materials, Consumer Discretionary and Industrials), rebalanced monthly.

Defensive Blend: An equal-weighted combination of five cap-weighted defensive sectors (Utilities, Energy, Consumer Staples, Health Care and Communication Services), rebalanced monthly.

Exhibit 2 illustrates the hypothetical performance of each blend, perhaps indicating that the sum of the parts is sometimes greater than the whole, as both the defensive and cyclical blends outperformed the S&P 500.

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S&P 500 sectors continue to play versatile roles in a variety of strategies. From making strategic and tactical tilts, to reflecting the diversification qualities that come from blends, sector approaches have endured and will continue to help us understand markets in 2025 and beyond.

¹ Cyclical and defensive blends are comprised of the top five and bottom five sectors as ranked by historical beta and volatility. Real Estate, ranked in the middle of the 11 S&P 500 sectors, is excluded from this analysis.

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