Equity markets are in a semi state of alert, judging by how investors are rotating their sector exposures. Such movement matters, and can help stock pickers with their selections, bearing in mind the old adage that ‘a bad stock in a good sector will outperform a good stock in a bad sector’.
Looking at 2026 as a whole, the sector performance trends may not provide too many surprises when the data across the eleven super-sectors in the S&P Global 1200 are used as a benchmark.
With brent crude oil trading at $95 a barrel, way above where it was before the initial Israeli and American assault on Iran in late February, the energy sector is in its element.
After that, though, the surprises begin.
Two relatively defensive sectors, whose fortunes are not tied to the economic cycle, rank second and fourth, in the shape of healthcare and consumer Staples.
The Democrat sweep of the mid-term elections, worries over how the hyperscalers will fund their spending on artificial intelligence and lofty valuations are weighing on the once all-conquering technology sector which now ranks only third.
In the middle of the pack come materials and financials, which perhaps fits with a picture of steady but unspectacular GDP growth and some doubts about the outlook for 2027, as does the slide in Industrials towards the bottom end of the rankings.
Then come the bond proxies, utilities and real estate, neither of which tend to do well when interest rates and bond yields are going up, followed by the real laggards, consumer discretionary and communications services.
Usually, a plodding utility like telecoms would do badly as bond yields go up and higher interest rates and lofty oil prices would be bad for consumer sentiment and spending power, so those weak showings are no great shock.
But the biggest stocks by market capitalisation, and therefore sector index weighting, are Alphabet, Meta, Tencent and Netflix within communication services and within consumer discretionary the top two are Amazon and Tesla. That suggests there is some fall-out from the cooling of sentiment toward the AI trade in evidence this autumn.
This is a timely reminder to look at the make-up of any index or basket of stocks, especially if you are researching the merits, or otherwise, of a passive tracker or exchange-traded fund designed to follow it and deliver the index’s performance, minus the instrument’s running costs.
The difference in sector performance trends between the first half and the second half to date is also worthy of further scrutiny.
Information Technology has gone from penthouse to outhouse and slumped from being the best performer to the worst.
Energy has been resilient as have consumer staples and healthcare, while industrials have been noticeably weak. These trends could reflect nagging worries over the economic outlook for next year, as well as worries over whether air is leaking out of an AI ‘bubble.
Are sliding crack spreads warning of tougher times ahead?
Less of a rumbling underneath and more of a loud roar adding to the noise in markets are the changes to oil prices, in particular the crack spreads.
The 3-2-1 crack spread compares the price of three barrels of crude oil with that of three barrels of refined product, usually petrol and diesel or heating oil.
It is therefore a guide to the profit margins gleaned by refiners. Rising crack spreads speak of tight supply, and weakness can warn of the opposite.
Crack spreads were an early warning signal that oil prices were not going to retreat as fast as equity and bond markets hoped, so weakness here now is eye-catching. Hopefully it means a peace deal between Washington and Tehran is on the way, but a smaller crack spread could also be a sign that high prices are once more proving to be the best cure for high prices, through the mechanism of demand destruction.
Weaker demand for energy would be a worrying sign when it comes to global growth and in this context, it is interesting to see how equity investors seem to be rotating toward defensive sectors, such as consumer staples and healthcare.
It is therefore intriguing to see crack spreads falling now, at a time when concerns over product flows through the Strait of Hormuz, Yemeni attacks on Saudi facilities and longer-term concerns over the availability of crude or refined supply from the Middle East and Ukraine and Russia remain unalleviated.
Perhaps refiners are anticipating a peaceful conclusion to the hostilities between Iran and America, especially as President Donald Trump appears to be stepping back from any further military escalation following his drubbing in the mid-term elections.
Equally, the crumbling crack spread may be warning of lower demand for refined products. Maybe refiners are starting to price in demand destruction as oil prices act as a tax upon consumers and companies, or they are sniffing out the prospect of a peace deal. After all, the statistician and risk analyst Nassim Nicholas Taleb asserted, ‘I’ve seen gluts not followed by shortages, but I’ve never seen a shortage not followed by a glut.’
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...