2025: The sector view
- 2024’s strongest sectors: communication services, tech
- Materials were the only negative sector last year
- Will “leader-to-laggard” pattern reappear in 2025?
The New Year has barely begun, but it’s not too soon to think about how market strength—and weakness—may play out among different sectors.
Tech (especially AI) momentum was a big story the past couple of years, but Morgan Stanley Wealth Management strategists think the possibility of new market leadership in 2025 argues for a shift from momentum to value and quality. Their favored areas of the market: financials, energy, residential real estate, and domestically-focused industrials and branded consumer-goods manufacturers. They also point out the health care sector looks oversold.1
While it’s impossible to forecast which areas of the market will outperform or underperform, a couple of simple year-to-year sector patterns have tended to play out over the past couple of decades—although 2024 turned out to be something of an exception.
The following table shows how S&P 500 annual sector returns ranked (1 = strongest, 11 = weakest) from 2002–2024:
Source (data): Standard & Poor’s. (For illustrative purposes. Not a recommendation. Note: It is not possible to invest directly in an index.)
The rankings for 2024 showed there was some stability in year-over-year relative sector strength: communication services and tech remained the strongest sectors, although they traded the No. 1 and No. 2 spots from 2023.
One of the more notable changes was the financial sector’s climb from sixth place in 2023 to third place last year. The only bigger move up the relative strength ladder was the utility sector’s jump from last place in 2023 to fifth place in 2024. Materials, which was the only sector that didn’t post a net gain last year, slipped the most in the rankings, falling from fifth place in 2023 to last place in 2024.
But perhaps the biggest “surprise” in 2024 was the break from one of the most consistent sector-performance patterns over the past couple of decades—the tendency for at least one of the sector leaders in a given year to be one of the laggards the next year. Except for 2004-2005 and 2005-2006, at least one of the top-three sectors in any given year became one of the following year’s four weakest.
If the leaders-to-laggards pattern returns this year, communication services, tech, or financials would have better-than-average odds of being one of 2025’s four-weakest sectors.
For example, 2023 represented an almost perfect inversion of leaders and laggards: The top-three sectors from 2022 (energy, utilities, and consumer staples) were the three weakest in 2023, while the three-weakest 2022 sectors (tech, consumer discretionary, and communication services) were the three strongest in 2023. But only one of 2023’s leading sectors—consumer discretionary—fell out of the top three in 2024, and it declined only one spot, to fourth place.
If the pattern returns this year, communication services, tech, or financials would have better-than-average odds of being one of 2025’s four-weakest sectors. Of course, that doesn’t imply a negative annual return, just a lower return than at least seven other sectors.
Also, the top-performing sector in one year held on to the top spot the following year only three times (energy in 2004-2005 and 2020-2021, tech in 2019-2020). The other 19 times, the top performer finished the following year no higher than third place, and no higher than fourth place 18 times. Tech broke from that pattern in 2024, finishing in first place in 2023 and falling only to second place last year. Overall, the leading sector in one year dropped 5-6 spots, on average, the following year, but it fell to ninth place more often than any other (five times).
For additional insights into sector dynamics, check out E*TRADE from Morgan Stanley’s latest monthly sector rotation study.
Reminder: US stock exchanges will be closed on Thursday, January 9 in observance of the National Day of Mourning for former President Jimmy Carter.
Today’s numbers include (all times ET): mortgage applications (7 a.m.), ADP private employment report (8:15 a.m.), weekly jobless claims (8:30 a.m.), preliminary wholesale inventories (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), EIA Natural Gas Report (12 p.m.), FOMC minutes (2 p.m.), consumer credit (3 p.m.)
Today’s earnings include: Albertson’s (ACI), MSC Industrial Direct (MSM).
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1 The GIC Weekly: Mo-Momentum? 1/6/25.