Rethinking US Equity Exposure Through Sectors

S&P 500 Sector Return Spread

May 2006 to April 2026

Over the past year, the communication services and information technology sectors have delivered returns in the mid-20% range, while financials have been mostly flat. Over a three-year horizon, communication services returned roughly 35%, compared to about 14% for financials. Even over five years, the spread remains notable, with technology delivering close to 20% annualized returns versus high single digits for more cyclical areas.¹

This growing divergence suggests that equity investors may want to take a more tactical approach. As dispersion rises, the difference between sector exposures can be more impactful.

The US market has structurally changed

Another important consideration is how much the US equity market itself has evolved. Two decades ago, sectors such as financials and energy played a much larger role in driving index returns. Today, information technology and communication services dominate, reflecting the rise of digital platforms, software-driven business models and asset-light growth companies.

GICS Sector Allocations: 2006 to 2025

Sector allocations within S&P 500 index have changed significantly in the past 20 years

Market weights are not the only thing shifting. We have also increasingly seen earnings growth resulting from certain digital transformations. This has particularly been the case with business models that benefit from scale—where larger platforms can serve more users at lower cost, and where growing user bases reinforce their competitive advantage. Communication services are a clear example. Today, nearly 70% of the global population uses social media, and close to 90% of adults are connected in some form. Digital advertising has become the primary channel for reaching consumers, while streaming, gaming and the broader creator economy are still rapidly expanding. Rather than viewing these as short-term trends, we believe they reflect deeper shifts that are shaping where growth and market leadership come from.

Macro forces are playing out at the sector level

In this environment, sectors can be considered a transmission mechanism for macroeconomic forces. Higher interest rates, for example, have supported bank profitability through stronger margins, but have also weighed on loan growth and valuations. Meanwhile, innovation cycles, particularly around AI, have continued to support technology and communication services. On the consumer side, spending patterns have become more selective, with US households cutting back in some discretionary categories while continuing to prioritize experiences such as travel, entertainment and live events. Recent surveys suggest Americans are seeking value rather than simply reducing spending, opting for shorter trips, discount retailers or fewer non-essential purchases to preserve spending on experiences and convenience. At the same time, online retail continues to gain share, accounting for roughly 17% of total US retail sales late last year, up meaningfully from pre-pandemic levels.²

These crosscurrents mean that different sectors can perform very differently, even within the same overall market. For investors, this raises an important question: How should portfolios adapt?

Broad US equity exposure remains a core building block for many portfolios. However, given the growing importance of sector-level dynamics, investors are increasingly looking to complement that core with more targeted exposures. Sector strategies can offer a more precise way to express views—whether leaning into structural growth, adjusting rate sensitivity or balancing cyclical and defensive exposures. For investors already holding broad US equity exposure, sector strategies may be used not only to increase exposure to specific structural themes but also to offset areas where the broad index may already be heavily concentrated.

Importantly, this is not about short-term timing. Instead, it reflects a shift from simply “owning the market” to more intentionally accessing the drivers of the market.

The dynamics we see today suggest a one-size-fits-all approach to US equities may be less effective, with opportunity lying in looking beyond the index and using sector-level exposures to complement core allocations and better align portfolios with the forces shaping returns.

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Endnotes

¹Source: Bloomberg. Net performance of S&P 500 Capped 35/20 Indices in US dollars as of February 27, 2026. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

²Source: KPMG Consumer Pulse: Memories Over Materials – Americans Slash Non-Essential Spend to Fund Summer Experiences. Kpmg.com. April 23, 2026.

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