Stock Sectors: What Are They? How Are They Used?

Here are key facts to know about equity sectors—what they are, what they do, and how stock sectors can be used in investing.

This article explains the basics of equity sectors using company names and their ticker symbols for general informational purposes only. For our six- to 12-month market outlook for stock sectors, see Schwab's monthly Sector Views. All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.

 

What are stock sectors? You may have heard the term but don't know what it means or how it relates to investing. Here's an overview of what sectors are and how they can be used.

What are stock sectors?

Sector classification is a way of sorting companies that do similar things, like Information Technology or Health Care. MSCI and S&P Dow Jones Indices developed the Global Industry Classification Standard (GICS®) in 1999 to provide a consistent set of definitions for stock sectors, as well as their underlying industry groups, industries and sub-industries. Each company within the framework is assigned a single GICS classification according to its principal business activity. 

The 11 current stock sectors are: 

  • Communication Services
  • Consumer Discretionary
  • Consumer Staples
  • Energy
  • Financials
  • Health Care
  • Industrials
  • Information Technology
  • Materials
  • Real Estate
  • Utilities

Here's how they're defined and the top 10 stocks by market capitalization in each sector. 

Communication Services sector

Communication Services is a relatively new sector, launched in September 2018 as a reclassification of what used to be called the Telecommunications sector. By that point, years of consolidation had shrunk the telecom sector to a handful of companies providing traditional fixed-line and wireless communication services, such as Verizon and AT&T. 

The 2018 change added media companies that both distribute and produce content, like Netflix and Walt Disney, as well as companies engaged in advertising, print and digital publishing (newspapers, magazines, books) and interactive home entertainment (including mobile gaming apps). It also added interactive media and services, including large search-engine and social media companies like Alphabet (parent company of Google) and Meta (parent company of Facebook)—companies that are currently viewed as among those at the forefront of research into artificial intelligence (AI).

In general, the sector tends to benefit from an expanding economy because many of its constituents rely on advertising and subscription revenue; however, its wireless and broadband service providers tend to be less economically sensitive. The evolution of AI could drive growth in the sector, but it's worth noting that the dominance of Alphabet and Meta—two of the largest stocks in the S&P 500® index by market capitalization1—can have an unduly large effect on sector performance. 

Top 10 stocks in the Communications Services sector by market capitalization:

  • Alphabet (GOOGL)
  • Meta Platforms (META)
  • Netflix (NFLX)
  • T-Mobile (TMUS)
  • Comcast (CMCSA)
  • Walt Disney Co. (DIS)
  • Verizon (VZ)
  • AT&T (T)
  • Charter Communications (CHTR)
  • Spotify (SPOT)

Source: FactSet, as of 1/18/2024

Consumer Discretionary sector

The Consumer Discretionary sector is pretty much what its name implies: It includes companies that make and sell products that consumers typically buy with discretionary income, such as cars, motorcycles and consumer electronics (such as TVs, home audio equipment and game consoles—but not computers, which are part of the Information Technology sector). Companies in Consumer Discretionary sector also make and/or sell housewares, home furnishings and appliances, home improvement goods including garden tools, luxury items like jewelry and designer clothes, apparel, shoes and leisure goods (such as sports equipment, bicycles, toys, etc.). The sector includes restaurants, casinos and hotels. 

Consumer Discretionary stocks historically are "cyclical," meaning highly sensitive to economic cycles; they tend to perform well when consumers feel financially secure, but may struggle when economic growth slows and unemployment rises. Longer-term trends like the shift toward online shopping or changing consumer tastes also may continue to affect the sector. 

Top 10 stocks in the Consumer Discretionary sector by market capitalization:

  • Amazon (AMZN)
  • Tesla (TSLA)
  • Home Depot (HD)
  • McDonald's (MCD)
  • NIKE (NKE)
  • Lowe's (LOW)
  • Booking Holdings (BKNG)
  • TJX Companies (TJX)
  • Starbucks (SBUX)
  • Airbnb (ABNB)

Source: FactSet, as of 1/18/2024

Consumer Staples sector

The Consumer Staples sector is in many ways the flip side of the Consumer Discretionary sector, filled with companies whose products tend to be needed even when the economy is weak—think food, toothpaste, toilet paper, laundry detergent, even tobacco products and beer. Because of this it's often called a "defensive" sector, or one that investors tend to view as stable even during uncertain times. The sector also includes retailers of these products, such as supermarkets, pharmacies and "big-box" stores like Costco and Walmart. 

As previously mentioned, the Consumer Staples sector tends to be relatively insensitive to economic ups and downs, as consumers usually buy staples regardless of economic conditions. However, inflation can shrink profit margins if companies are unable to raise prices enough to offset higher costs.

Top 10 stocks in the Consumer Staples sector by market capitalization:

  • Walmart (WMT)
  • Procter & Gamble (PG)
  • Costco (COST)
  • Coca-Cola (KO)
  • PepsiCo (PEP)
  • Philip Morris (PM)
  • Mondelez International (MDLZ)
  • Altria Group (MO)
  • Colgate-Palmolive (CL)
  • Target (TGT)

Source: FactSet, as of 1/18/2024

Energy sector

The Energy sector includes companies that extract fuels from the earth—oil, natural gas or coal—or provide the services and equipment to companies that do so. The sector includes companies involved in exploration, drilling, oilfield services, refining, storage, marketing and supplying the equipment and services needed for those activities. 

The Energy sector historically is very sensitive to oil prices; higher prices usually support earnings growth and vice versa. Oil prices in turn tend to be tied to global economic activity—growth supports demand—and supply, which can be affected by unexpected geopolitical events.

Top 10 stocks in the Energy sector by market capitalization:

  • Exxon Mobil (XOM)
  • Chevron (CVX)
  • ConocoPhillips (COP)
  • Schlumberger (SLB)
  • EOG Resources (EOG)
  • Enterprise Products Partners (EPD)
  • Marathon Petroleum (MPC)
  • Phillips 66 (PSX)
  • Pioneer Natural Resources (PXD)
  • Occidental Petroleum (OXY)

Source: FactSet, as of 1/18/2024

Financials sector

Any company that handles money is probably in the Financials sector. This includes large diversified banks, regional banks, investment banks, and asset management and custody banks, including those that operate mutual funds. It also includes payment processors, consumer finance companies, mortgage loan originators, insurance companies, financial exchanges and financial data companies, as well as multi-sector holding companies that invest in various types of businesses. 

The sector can benefit from rising interest rates, which allow banks to lend at higher rates and insurance companies to increase returns on collected policyholder premiums. However, it's a balancing act—if interest rates rise high enough to slow economic activity, it can result in lower loan demand and higher loan losses. 

Top 10 stocks in the Financials sector by market capitalization:

  • Berkshire Hathaway (BRK.B)
  • Visa (V)
  • JPMorgan Chase & Co. (JPM)
  • Mastercard (MA)
  • Bank of America (BAC)
  • Wells Fargo (WFC)
  • Blackstone (BX)
  • S&P Global (SPGI)
  • Morgan Stanley (MS)
  • American Express (AXP)

Source: FactSet, as of 1/18/2024

Health Care sector

The Health Care sector has two main segments. One is health care equipment and services, which includes companies that make medical devices and hospital supplies, as well as service providers like hospitals, nursing homes and health maintenance organization (HMO) companies. The other is biotechnology, pharmaceuticals and life sciences, which involves companies that research and develop therapeutics and drugs. 

The Health Care sector historically has been considered "defensive," as people usually pay for needed medical care even during recessions (although elective procedures often decline). The aging U.S. population is expected to increase demand for health care services over time. However, government intervention is an ongoing risk for companies in the sector, and fundamentals are often weak for some of the riskier research-and-development companies.

Top 10 stocks in the Health Care sector by market capitalization:

  • Eli Lilly (LLY)
  • UnitedHealth Group (UNH)
  • Johnson & Johnson (JNJ)
  • Merck (MRK)
  • AbbVie (ABBV)
  • Thermo Fisher Scientific (TMO)
  • Abbott Laboratories (ABT)
  • Danaher (DHR)
  • Amgen (AMGN)
  • Pfizer (PFE)

Source: FactSet, as of 1/18/2024

Industrials sector

The Industrials sector produces capital goods, or items made for other companies to use to produce goods and services (versus consumer goods, which are sold directly to consumers). These include aircraft and parts, construction, industrial and agricultural machinery, electrical and mining equipment. It also includes transportation-related companies like passenger airlines, railroads, air freight, trucking and marine port operators. Finally, it covers professional and commercial services, such as commercial printing, waste management, facilities management, security and alarm services, office supplies, human resources and employment services, scientific research and architectural design.

The Industrials sector can benefit when economic growth raises business confidence, leading to new building projects, machinery purchases, increased airline travel and shipments. However, the reverse is also true: Rising inflation and higher interest rates can weigh on the sector, as borrowing costs may rise and depress business and consumer spending.

Top 10 stocks in the Industrials sector by market capitalization:

  • Union Pacific (UNP)
  • Caterpillar (CAT)
  • General Electric (GE)
  • United Parcel Service (UPS)
  • Honeywell International (HON)
  • Uber (UBER)
  • Boeing (BA)
  • RTX Corp. (RTX)
  • Lockheed Martin (LMT)
  • Deere & Co. (DE)

Source: FactSet, as of 1/18/2024

Information Technology sector

The Information Technology sector contains some of the largest companies in the S&P 500, including mega-caps like Microsoft, Apple and Nvidia. Companies in the sector make software applications and provide services and infrastructure, such as data centers and cloud networking and storage. They also make hardware and equipment, such as personal computers, cellphones, servers and routers. Finally, the sector includes manufacturers of semiconductors and related products, such as solar modules and cells.

Information Technology tends to do well when strong economic growth encourages companies to invest in technology upgrades and consumers to buy new devices. However, rising interest rates can weigh on the sector, and investor enthusiasm about companies' long-term potential means some stocks trade at high prices relative to their earnings. Also, the dominance of a few mega-cap stocks can affect sector performance.

Top 10 stocks in the Information Technology sector by market capitalization:

  • Microsoft (MSFT)
  • Apple (AAPL)
  • Nvidia (NVDA)
  • Broadcom (AVGO)
  • Oracle (ORCL)
  • Adobe (ADBE)
  • Salesforce (CRM)
  • Advanced Micro Devices (AMD)
  • Accenture (ACN)
  • Cisco Systems (CSCO)

Source: FactSet, as of 1/18/2024

Materials sector

The Materials sector includes companies that extract and/or refine raw materials—for example, metals miners, loggers, and companies that make chemicals, paints, plastics, fertilizers, glass, paper and packaging products. 

The Materials sector tends to do well when the global economy is growing and demand is increasing. However, the supply of natural materials isn't infinite and can be affected by geopolitical issues. Rising inflation and rising interest rates can undercut business spending. Finally, the sector relies heavily on foreign demand, and a strong U.S. dollar can weaken sales abroad by making products more expensive for foreign buyers.

Top 10 stocks in the Materials sector by market capitalization:

  • Linde (LIN)
  • Sherwin-Williams (SHW)
  • Southern Copper Corp. (SCCO)
  • Air Products and Chemicals (APD)
  • Ecolab (ECL)
  • Freeport-McMoRan (FCX)
  • CRH (CRH)
  • Nucor (NUE)
  • Newmont (NEM)
  • Dow (DOW)

Source: FactSet, as of 1/18/2024

Real Estate sector

The Real Estate sector includes companies that develop and manage commercial real estate, like shopping centers, office buildings or storage facilities. But it is dominated by commercial Real Estate Investment Trusts (REITs), which are tax-advantaged entities that invest in properties like offices, industrial parks, telecom towers, retail malls, hotels, hospitals, timberland and self-storage facilities. (Although some of these REITs own income-producing residential real estate such as apartment buildings, they are not home-mortgage REITs—those are in the Financials sector.)

The Real Estate sector tends to benefit from economic growth, which increases demand for commercial space and supports tenants' ability to pay rent. However, most REITs borrow heavily in order to make investments, which makes them vulnerable to rising interest rates.

Top 10 stocks in the Real Estate sector by market capitalization:

  • Prologis (PLD)
  • American Tower Corp. (AMT)
  • Equinix (EQUIX)
  • Simon Property Group (SPG)
  • Public Storage (PSA)
  • Welltower (WELL)
  • Crown Castle (CCI)
  • Realty Income Corp. (O)
  • Digital Realty Trust (DLR)
  • CoStar Group (CSGP)

Source: FactSet, as of 1/18/2024

Utilities sector

The Utilities sector includes the companies that keep the lights on and the water running—that is, electric, gas and water utilities. Companies that generate electricity from renewable sources like wind and solar power are also part of the Utilities sector, as are gas and power marketing and trading specialists. 

Utilities is considered a defensive sector, because even during recessions consumers generally cut other spending before they stop paying their utility bills. That can make Utilities attractive to investors when economic growth slows. On the other hand, utilities are subject to extensive and changing regulatory oversight. They also have to spend heavily to maintain and upgrade their infrastructure; many borrow to do so, which makes them vulnerable to rising interest rates.

Top 10 stocks in the Utilities sector by market capitalization:

  • NextEra Energy (NEE)
  • Southern Company (SO)
  • Duke Energy Corp. (DUK)
  • Sempra (SRE)
  • American Electric Power Co. (AEP)
  • Dominion Energy (D)
  • PG&E Corp. (PCG)
  • Constellation Energy (CEG)
  • Exelon (EXC)
  • Xcel Energy (XEL)

Source: FactSet, as of 1/18/2024

How can investors use stock sectors?

Appropriate diversification is important, and that includes investing across sectors. Becoming too concentrated in one sector can leave your portfolio vulnerable to a downturn that affects only a small part of the market. Schwab clients can log into their accounts and use Schwab's Portfolio Checkup tool to help assess their sector allocations. If they decide to make adjustments, they can use the Stock Screener to research particular stock sectors. Schwab's ETF Screener and Mutual Fund Screener can be used to explore funds that specialize in particular stock sectors. Investors should consider this as only a single factor in making their investment decisions, while considering the current market environment.

"Sector rotation" is another strategy some investors use. Because the economy regularly cycles through fairly standard phases—expansion, peak, contraction and trough—the idea behind sector rotation is to invest in the stock sectors that historically outperform during the phase investors believe the economy is in or is headed toward. 

For example, during the expansion phase, job growth and improving consumer confidence have tended to benefit the Consumer Discretionary sector. As the economy continues toward a peak, businesses may begin spending more to expand operations or improve productivity, which often benefits Information Technology, and interest rates usually rise, which can benefit Financials. During a contraction, less-sensitive stock sectors like Consumer Staples and Health Care may outperform. However, it's worth noting that it's fairly easy to identify a cycle after it's over—it's a lot harder to predict the end of a current cycle or the beginning of the next one. Also, stock sectors evolve and change, and may not always perform the same way they have in the past. 

1 Source: FactSet, as of 1/18/2024.

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