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The recent market rotation toward small caps and value has also extended toward sectors,¹ with Technology, which was one of the top-performing sectors of 2025, turning from a leader into a laggard in January. Meanwhile, cyclical sectors including Energy and Materials have outperformed.

But how challenging have the conditions been for sector allocators? Exhibit 1 shows that only three S&P Select Sector Indices² outperformed The 500^® last year, but that that number has broadened considerably since then, with seven sectors outperforming the benchmark in January.

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Stock-pickers faced a similarly tough environment last year, as just 30% of stocks outperformed the S&P 500^®.³ A natural question is the degree to which sector trends dictated the success of within-sector stock selection. Exhibit 2 shows that 50% of S&P 500 Consumer Discretionary and 47% of S&P 500 Energy stocks outperformed their respective sector benchmarks, compared to only 22% of S&P 500 Real Estate stocks. More recently, 51% of stocks outperformed their respective sector benchmarks in January, higher than the 36% average seen last year.

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To analyze the tradeoffs of sector versus stock selection, we turn to dispersion, a measure of cross-sectional volatility and an indicator of opportunities for stock and sector selection. Specifically, we analyze the contribution of cross-sector effects to total market dispersion.⁴ The long-term average of 0.22 means that, on average, 22% of the market’s total dispersion was attributable to cross-sector effects. Exhibit 3 shows that the contribution of sectors to S&P 500 dispersion was above average for parts of 2025, particularly during the first half of the year, when tariff-related tensions meant greater rewards for choosing sectors that would succeed during the shifting global political landscape. The importance of sector selection also rose during November, when the impact of resurging fears of an AI bubble varied across sectors.

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In addition to dispersion, correlations—particularly cross-sector correlations—can be a useful proxy for assessing the risk environment for sector allocation. Exhibit 4 shows that managers may have had ample opportunities for diversification as they navigated last year’s shifting volatility regime.⁵ Almost half of the correlations between daily select sector excess returns were between -0.3 and 0.3. Unsurprisingly, Technology, the largest and top-performing Select Sector, had a consistently negative correlation with all 10 other Select Sectors, which has continued in January.

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With a potential market shift underway, understanding the nuances of sectors from a risk/return vantage point may prove useful when navigating geopolitical, economic and tariff-related uncertainties through the rest of 2026.

¹ Fox, Rachel. “How to Spot—and Capitalize on—a Sector Rotation.” The Wall Street Journal. Jan. 4, 2026.

² For information on the differences between S&P 500 Select Sectors and S&P 500 Sectors, see the S&P U.S. Indices Methodology

³ Ganti, Anu. “2026 Is the Year of the Stock Picker?” S&P Dow Jones Indices LLC. Dec. 16, 2025.

⁴ Edwards, Tim and Lazzara, Craig J. “Dispersion: Measuring Market Opportunity.” S&P Dow Jones Indices LLC. December 2013.

⁵ Further information can be found in our Dispersion, Volatility & Correlation dashboard.

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