With 2024 within the rearview mirror, investors who benefited from the S&P 500’s 23.31% gain last yr are hoping for more of the identical in 2025. But with big banks forecasting tempered outlooks for the brand new yr, pinpointing specific sectors throughout the market could offer greater returns than the broad indices.
In December, JPMorgan Research set a 2025 year-end price goal of 6,500 for the S&P 500, representing just an 11.49% gain from current prices. In its report, the investment bank attributed quite a few aspects to the conservative estimate, including China’s economic slowdown, higher-for-longer rates of interest and the potential fallout of President-elect Donald Trump’s trade and immigration policies.
Despite last yr’s bull market, and in light of analysts’ reserved projections, this yr investors will probably want to give attention to a handful of individual sectors of their attempts to outperform the broad index.
S&P 500 sectors to avoid
The S&P 500 — a stock market index that tracks the performance of 500 of the most important publicly traded corporations listed on U.S. exchanges — spans 11 sectors. Quite a few asset management corporations, resembling State Street and iShares by BlackRock, offer sector-specific exchange-traded funds (ETFs), which permit investors to carry shares of diverse corporations operating inside each individual sector.
Any given yr, on a sector-by-sector basis, a few of these ETFs outperform the broad index, and a few underperform. The expansion-focused information technology sector, for one, has outpaced the market five of the last six years. Meanwhile, industrials and materials — the latter of which posted the worst performance in 2024 — find themselves within the limelight less often.
The energy sector, for its part, is very cyclical. In 2021 and 2022, energy received top marks by posting gains of 54.6% and 66.7%, respectively. But with record production and a looming oil and gas surplus, the sector finished fourth-worst in 2024. In consequence, the Energy Select Sector SPDR Fund (XLE) only posted a gain of three.89% in 2024, or roughly 20% lower than the S&P 500. That macro environment could proceed to weigh on the oil majors, most of which ended last yr within the red.
Rate of interest-sensitive sectors like real estate may additionally proceed to struggle because the Federal Reserve has expressed concern about inflation creeping back up. While the Fed cut its benchmark rate by a full percentage point last in 2024, it’s more likely to embrace a higher-for-longer rate environment until the impacts of Trump’s tariffs and immigration policy are fully understood.
One other underperformer in 2024 — consumer staples — is unlikely to post sizable returns this yr. Louise Goudy Willmering, a chartered financial analyst and partner at Crewe Advisors, says two of the most important retailers within the U.S., Walmart and Costco, are showing signs of being overpriced.
“Each posted [sizable] returns in 2024,” she says. “Their multiples seem slightly stretched … possibly making a drag on the general performance of the sector.”
Consumer staples could also flounder this yr if corporations operating in that sector see their costs rise beyond what consumers are willing to pay. Food market stocks, for instance, have proven able to doing that up to now. Because consumer staples entail essentials like food and clothing, buyers’ habits typically don’t change with price adjustments. Nevertheless, worsening inflation could cause shifts in consumer behavior, negating the sector’s historical ability to depend on inelastic demand.
Despite these sectors’ potential underperformance in 2025, in certain corners of the market, Willmering and other investment professionals see opportunity.
Expect more from 2024’s best-performing sector
Last yr, for the primary time in 15 years, the communication services sector finished as the highest performer within the S&P 500. Driven by the successes of telecom corporations like T-Mobile and streaming services like Netflix, the sector gained nearly 34% in 2024, providing shareholders of the Communication Services Select Sector SPDR Fund (XLC) with a ten% advantage over the broad market.
That is one sector we will expect to stay strong, based on Andrew Evans, founder and CEO of Rossby Financial.
“As a people, we wish more information faster and that only comes from the telecommunications sector,” he says, pointing to the ubiquity of streaming services, podcasts and smart devices.
It is a sentiment shared by Willmering, who suggests the communications services sector has been bolstered by a handful of corporations which have migrated from tech in recent times, helping the sector grow beyond legacy telecom corporations.
“Gone are the times of the old telecommunications sector that was largely represented by AT&T and its ‘baby bells,'” she says.
Since being rebranded as communication services in 2018, the sector is now home to former tech sector corporations resembling Alphabet and Meta, the first- and fourth- largest corporations on the planet by market cap. Willmering says this influx of tech, combined with streaming corporations like Disney and Netflix, indicates strong performance from the sector within the yr ahead.
A return of merger and acquisitions (M&A) activity would further bolster the communication services sector’s odds of success this yr. In keeping with KPMG, one in all the massive 4 accounting services firms, in 2023, M&A activity fell to its lowest level in a decade with 2024 showing only a slight increase. Nevertheless, with President Biden-appointed Lina Khan vacating her role on the Federal Trade Commission this month, it is anticipated to pave the best way for less M&A scrutiny under Trump’s second term.
“These [communication services] businesses are reinventing themselves and creating recent opportunities,” she says. “A more merger-friendly administration could allow for synergies that could possibly be useful to investors again in 2025.”
Tech will overcome obstacles
Nevertheless, in relation to antitrust practices within the technology sector, the president-elect has been a vocal critic. But within the ramp-up to January 20, quite a few members of the Magnificent Seven donated tens of millions to Trump’s inauguration fund, including Alphabet, Apple, Meta and Microsoft.
Donations aside, support from the tech sector is unlikely to dissuade Trump from addressing anti-competitive behavior in Big Tech. “I do not see him being easily ‘bought’ by campaign donations,” Evans says. “The donations could sway thoughts, but ultimately, he’ll only pump the brakes if it suits [his] agenda.”
As an alternative, Evans sees artificial intelligence being a significant driver for the tech sector — and others — in 2025. “The prospect of what AI can do goes to repeatedly fuel performance,” he says. “Very like the birth of the web or the constructing of the railroads, the infrastructure will take time. I feel we are going to see spin-off profit in various other sectors due to [that] tech growth.”
Those broad impacts and applications of AI in other sectors is a very worthwhile tailwind. “Technology is within the unique position of influencing how business can be done in virtually every economic sector going forward,” Willmering says. “That demand is evolving to incorporate yet-unimagined applications.”
Lofty valuations, concerns around tariffs, rates of interest and antitrust concerns will likely lead to tech volatility this yr, based on Willmering. However the sector still warrants a spot in long-term portfolios, she argues, “even when it’s not in the highest five performers of 2025.”
Utilities could provide value
After ending last amongst all sectors in 2023 with a -7.10% loss, the utilities sector bounced back last yr, marginally trailing the broad market. This yr, that momentum could proceed in consequence of AI spill-over from the tech sector.
“I believe utilities stand to realize essentially the most from technology growth,” Evans says, specifically citing elevated power demand from AI chipmakers. “With power comes heat, then the necessity for cooling [and] maintenance on those systems. Amazon and Microsoft are actively buying power from various providers; it isn’t much of a stretch to think that Bezos would just go ahead and buy a couple of energy producers outright.”
This past fall, Amazon offered $334 million to fund a multi-year feasibility study in partnership with Energy Northwest regarding the event of small 4 modular nuclear reactors. More broadly, last yr Goldman Sachs found that AI is poised to drive a 160% increase in data center power demand.
Nevertheless, like energy, the utilities sector is very cyclical. And at current prices, additionally it is experiencing potentially inflated valuations, warns Willmering.
Even when utilities cannot repeat its 23.4% gain from last yr, there’s still a probability the sector outperforms JPMorgan’s forecasted 11.49% gain for S&P 500 through the remainder of 2025. “Utilities could add diversification,” she says, because the “sector is traditionally known for its regular growth and comparatively stable dividend stream.”
No matter which sectors outperform or underperform in 2025, most analysts agree on the direction the market goes: up and to the appropriate. As Evans points out, “We live in a growth economy. Without growth, we cannot innovate, improve and higher the general lifestyle for everybody.”
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