Stock Market Sectors: A Strategic Overview


As we’ve examined some of the core metrics used in evaluating stocks, we keep returning to a fundamental point: it’s extremely important to consider these numbers in the context of a specific sector or industry. Different industry’s feature widely divergent business models that force us to think about their performance differently. 

First off, let’s define the difference between an “industry” and a “sector.” Sectors are the broader category, and any given sector will feature multiple industries. The Finance sector, for instance, would include industries like retail banking, investment banking, private equity, payday lending, and stock brokerages. Some market forces are likely to affect an entire sector (like interest rates for Finance). Other events exhibit more focused effects on given industries. Savvy investors should consider the forces operative at both levels. 

We conduct a high-level overview of the stock market’s 11 sectors below. In the coming weeks, we’ll examine each of these sectors (and some of their more important industries) for a closer look.

  1. Finance: different types of banks, various investment funds, insurance firms, and stock brokerages are among the most prominent components of this sector. In general, we would expect the revenue generated by this sector to come from loans, which earn more as interest rates rise. Since we expect higher rates in a hotter economy, the prototypical finance firm is seen as a pro-cyclical play.
  2. Telecom: This sector includes a diverse cluster of industries including wireless providers, cable companies, and ISP’s. These companies often feature stable, subscription-based revenues, but can also be vulnerable to dramatic technological disruption (think the decline of AoL).
  3. Materials: this diverse sector includes resource extraction and processing operations such as mining, metal refining, chemical production, and forestry. One commonality: raw material producers are likely to be pro-cyclical plays, with raw material prices riding high during booms and falling dramatically during busts. Notably, this sector doesn’t include gas/oil/energy firms, which are so important to the global macroeconomy that they get their own sector.
  4. Energy: these stocks include different levels of the energy production vertical in gas and oil, from exploration to production to refining. Obviously, the success of these stocks in tightly related to the path of global energy prices. Thus, these stocks are often traded as proxies for the expected path of energy prices as much as on individualized results.
  5. Utilities: this includes electric, gas, and water companies. With limited growth opportunities (US utilities are generally run as public-private or highly regulated monopolies over a defined geographic range), these stocks are all about a fat dividend yield from stable long-term earnings. With stable earnings likely to persist in a downturn, this sector is traditionally counter-cyclical.
  6. Real Estate: companies invested in residential, industrial, and commercial real estate. These firms earn from both rental income and property appreciation. Like finance, this sector is highly sensitive to interest rate changes. Real estate is also highly speculative, rendering this sector pro-cyclical. 
  7. Technology: everything from hardware manufacturers to software developers to IT firms. This sector continues to become a larger and larger portion of the economy: its underlying industries have such different business models that drilling down deeper than the sectoral level will almost certainly be necessary.
  8. Healthcare: including diverse segments such as biotech companies, medical device firms, and hospital groups, healthcare returns can be heavily dependent on political events. They also present a unique nexus, however, of both growth opportunity (healthcare continues to grow as a share of the economy) and earnings safety (we’d generally expect healthcare spending to remain relatively stable during a recession).
  9. Industrials: including aerospace, defense, machinery, construction, and manufacturing, this sector once again requires industry-specific research. One commonality that’s been important in recent months: with large internationalized supply chains and international customers bases, these firms can be vulnerable to trade disruptions.
  10. Consumer Staples: These final two categories attempt to sort consumer spending into more pro- and counter-cyclical categories. Staples includes firms where consumers are less likely to cut spending during downturns, like food, tobacco, and basic household products.
  11. Consumer Discretionary: from media companies to retailers to apparel, these companies are perceived as more sensitive to shifts in consumer sentiment.

We’ll begin drilling down in each of these sectors in the common weeks. Our users profit from each one of them using our real-time stock news analytics platform. If you’d like to learn more, we’re pleased to invite you to one of our totally free virtual training seminars. There’s no hard sell or obligation, just a look at our platform and an efficient strategy for finding market-beating profits. You can claim a spot in our next available session using the button below.

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