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The S&P 500 index, as measured by the SPDR S&P 500 ETF Trust (SPY), has underperformed traditional defensive sectors—utilities and consumer staples—over the past month.
SPY’s one-month return is –0.3% while the Utilities Select Sector SPDR ETF (XLU) and the Consumer Staples Select Sector SPDR ETF (XLP) gained 7% and 3%, respectively.
What does this say about investor sentiment? Is the economy beginning to soften?
Technology, Consumer Discretionary Sectors Lag
Leading sectors in 2023—technology and consumer discretionary—are also beginning to stumble as they logged one-month declines of –0.4% and –1.5%, respectively, as measured by the Vanguard Information Technology ETF (VGT) and the Consumer Discretionary Select Sector SPDR ETF (XLY).
The tech and consumer discretionary (also known as consumer cyclicals) sectors combine to make up 40% of the S&P 500 index. Furthermore, the so-called Magnificent 7 stocks, which have contributed more to the market’s returns than any other single group, come from these two sectors.
Thus, the performance of the S&P 500 largely depends on the performance of the Mag 7 and the broader tech and consumer discretionary sectors.
Why Are Defensive Sectors Outperforming SPY?
Over the past month, prices for utilities and consumer staples stocks have gained while technology and consumer discretionary stocks have dropped. This may signal that investors are rotating sectors or cutting exposure to risk areas while to defensive areas.
Investors have had time to digest first quarter corporate earnings, which have been mostly positive according to Factset data. Still, sky-high expectations for Mag 7 stocks like Tesla Inc. and Amazon.com Inc. aren’t not being met, as reflected in their respective one-month returns of 1% and 1.5%.
This week, other consumer discretionary companies like Uber Technologies Inc., Airbnb Inc. and Shopify, Inc. had positive earnings but provided weaker-than-expected forward guidance, disappointing investors and potentially indicating a softening in the economy.
The recent shift in investor sentiment may be short-lived, but it’s possible that investors are beginning to anticipate a prolonged economic slowdown in the second half of 2024, which would favor defensive sectors like utilities and consumer staples over cyclical sectors like tech and consumer discretionary.
SPY, Tech, Consumer Discretionary vs Defensive Sectors
| Ticker | Fund Name | 1-Mo | 1-Yr |
| 7.14% | 5.61% | ||
| 3.10% | 2.33% | ||
| -0.28% | 27.10% | ||
| -0.43% | 34.36% | ||
| -1.49% | 21.36% |
Data as of May 8, 2024.