How does 2025 stack up to other positive years, and which sectors are most sensitive to the market direction heading into 2026?
As investors and advisors, whether we get a positive or negative year from the market can significantly impact portfolio outcomes. With the advantage of hindsight, we know that 2025 has been a positive year for markets. Unfortunately, as we look ahead to the new year, we can’t have the same confidence in whether the S&P 500 will have its fourth consecutive positive year or not. With all that in mind, how does 2025 stack up to other positive years, and which sectors are most sensitive to the market direction heading into 2026?
While the S&P 500 has averaged a 10% return since 1992, it usually performs far better during a positive year. Specifically, if the S&P 500 is positive, it averages a gain of more than 18%. That means that despite the index gaining 16.2% this year, 2025 has been below average for a positive year! The S&P 500 is arguably the most important index, but most advisors allocate beyond broad market exposure. While indices are sensitive to up or down markets, sectors can be more dependent on the direction of the market. Given many investors' tactical allocation, how have the major sectors performed in 2025 relative to other positive years, and how heavily are they impacted by the market’s performance?
While this year has been positive, market leadership has been dominated by technology, as the iShares U.S. Tech. ETF (IYW) is up 25.2%, which is the most of the major sector iShares funds. However, IYW has historically averaged a gain of 31.6% when the S&P 500 is positive, meaning that even tech has underwhelmed compared to other positive years. Looking at the lineup of other iShares major sector funds, in addition to the Fidelity Communications Services ETF (FCOM), technology was not alone in its subdued performance. In fact, only three of the eleven major sectors—communication services, basic materials (IYM), and utilities (IDU)—have exceeded their historical averages in past years SPX was positive.
More broadly, there’s several sectors that stand out as outperformers in positive years, many of which have had a strong 2025. Specifically, the tech, communications, consumer discretionary, and industrials sectors (in that order) average the highest return in positive years—all more than the S&P 500 as well. As a result, investors optimistic about market strength may consider overweighting these higher-beta sectors. Meanwhile, it would be a risk-on sign to see those sectors round out the top of DALI or Asset Class Group Scores’ sector rankings. With Tech, Communications, and Industrials currently sitting at the top of DALI, those sectors should continue being points of emphasis while also signaling greater confidence in the strength of the broader market.
So far, we have been focusing on what the market will do assuming it moves higher. While we’d like to see the market rise each year, that’s not an assumption we can make, unfortunately. When the S&P 500 has declined in a year, it’s usually done so by a decent margin, falling 12.6% on average since 1992. Meanwhile, the previously mentioned risk-on sectors take a larger hit, especially tech and communications, which lose 17.8% and 22.2%, respectively. Technology and communications exhibit the greatest sensitivity to market direction, with performance swings of nearly 50% and 43% between positive and negative SPX years.
On the other hand, Healthcare is the only sector not to decline on average when the S&P 500 falls, averaging a negligible 0.01% gain. Additionally, the energy, utilities, and consumer staples sectors see declines of less than 5%, positioning them as other defensive options during market downturns. Meanwhile, high rankings for these sectors in DALI or ACGS would reflect a defensive posture and signal a potential lack of strength in the market. One exception might be the energy sector, which is often driven more by movement in energy commodities than the overall market. The sector’s annual return has a correlation with the market of only 0.32. Utilities and real estate are the next closest with correlations in the low 0.50s, followed by healthcare and materials in the 0.60s. Conversely, most of the risk-on sectors carry the highest correlation with overall market performance.
Next year’s direction remains uncertain, but the market’s sensitivity to up or down movement can at least provide context on our current environment, offering insight into what next year might have in store. With risk-on sectors continuing to sit in the driver’s seat of the market, those groups should be areas of focus entering the new year, especially as they hold onto the top spots in DALI. However, areas like healthcare, staples, utilities, and energy could be groups to monitor for those cautious of a decline given the sectors’ greater isolation from the market.
