Getting Your Sectors Weights Right is Key – and Hard
Posted: March 03, 2026
March 2, 2025 (Maple Hill Syndicate) –- Think of the U.S. stock market as a pizza. According to Standard & Poor’s, it’s cut into 11 pieces, or sectors.
Astute or poor sector selection often makes the difference between a good year in the market or a bad one. Here are my views on the 11 sectors, listed in order of their performance in the 12 months through January (the “period return”). During that time, the S&P 500 Total Return Index returned 16.35%.
Communication Services
Period return 29.5%. The communication services sector includes media and internet stocks, such as Alphabet Inc. (GOOGL), Meta Platforms Inc. (META), Netflix Inc. (NFLX) and Walt Disney Co. (DIS), as well as traditional telephone stocks such as AT&T Inc. (T), Verizon Communications Inc. (VZ) and T-Mobile US Inc. (TMUS).
I think the group will continue to do well. Many of these companies are ad-dependent and will benefit from political advertising in an election year.
Technology
Period return 25.6%. Technology stocks surged in the past three years and have sputtered so far this year as investors worry about massive expenditures on data centers.
My stance is to be present in the sector, but underweight. The tech sector is the hub of innovation, so to ignore it would be foolhardy. But the valuations give me a feeling of acrophobia.
For example, Nvidia Corp. (NVDA) sells for 36 times earnings, Taiwan Semiconductor Manufacturing Co. (TSM) 30 times, and Microsoft (MSFT) 25 times. By comparison, the average stock has sold for about 15 times earnings over the years, and about a 24 multiple now.
Energy
Period return 21.8%. I like the oil-and-gas stocks. The price of oil fell in 2025 due to over-abundant supply, but has risen this year because of Middle East strife. In January, energy was the best performing group, jumping 14%.
The Trump administration has banished incentives for people to buy electric cars. And the winter of 2025-2026 was severe. Both factors favor oil-and-gas stocks.
Industrials
Period return 21.3%. This is my favorite sector, for two reasons. First, valuations are down-to-earth. Second, the sector includes the defense stocks, which I favor in a world where the U.S. is at odds with China, Russia and Iran.
My favorite defense stocks aren’t American ones, though. They are European, since Europe is being forced (both by Vladimir Putin and by Donald Trump) to spend more on national defense than it has for decades.
Utilities
Period return 14.3%. Normally stodgy, utilities are popular investments now because tech giants are greedy for electricity to run data centers. I think the popular thesis makes sense but I still feel uneasy.
Why? Minimal sales and earnings growth over the past decade, coupled with pretty high debt levels.
Materials
Period return 13.8%. The materials sector includes chemicals, steel, and mining among other things. My interest is chiefly in gold, which tends to rise when people feel insecure, when government deficits are large, when international tension is high, or when the dollar is weak. Now, all four are true.
Consumer Staples
Period return 9.7%. This is a good group to own during recessions. Even in bad times, people need tissues, toothpaste and soap. I don’t love the group as a whole, but it contains a bargain here and there, in my view.
Health Care
Period return 7.3%. Big pharmaceutical companies face intense pressure to restrain price increases. But health care is usually a good sector for shelter from market downturns.
Eli Lilly & Co. (LLY) has been a standout because of its weight-loss drugs. I think the company will continue to do well, but I’m skeptical of the stock at 45 times earnings. Several of the other pharma companies seem attractively cheap.
Financials
Period return 5.4%. I think financial stocks are due for a comeback.
The best environment for banks is low short-term interest rates (so they don’t have to pay out too much on deposits) and high long-term rates (so they reap rich returns on mortgages and business loans). It looks like that’s the kind of environment we’ll be in this year.
Real Estate
Period return 4.2%. The second-worst performing group for the 12 months through January was real estate, up about 4%. If there are signs of an imminent revival, I can’t discern them.
Consumer Discretionary
Period return 3.3%. Stocks that depend on consumers opening their wallets have struggled. Consumer confidence is low, which I attribute to tariffs, deportations, military threats and skirmishes, and fraying of the Atlantic alliance.
I like the moribund homebuilders, which I believe will take off if mortgage rates subside.
Disclosure: I own Alphabet and Taiwan Semiconductor personally and for most of my clients. One or more of my clients own Nvidia, Eli Lilly and Microsoft.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at jdorfman@dorfmanvalue.com.