March is just about over, and it has definitively been a month of rotation in the stock market rally.
As of Tuesday’s close, Energy (XLE) had been the largest outperformer, gaining more than 9%. Meanwhile, Materials (XLB), Utilities (XLU), Communications Services (XLC), Financials (XLF), and Industrials (XLI) all beat the returns of the S&P 500 (^GSPC) for the month.
Notably, this put the year-to-date performance of Financials, Energy, and Industrials above that of the benchmark index, furthering signs of a broadening-out of a market rally that had initially largely been driven by gains in Tech and Communications Services (which contains several large tech companies).
“What’s happened so far this year is more signs of a broadening under the surface,” Citi US equity strategist Scott Chronert told Yahoo Finance.
Chronert added that sectors that have outperformed are typically tied to economic growth while the sectors that have lagged the S&P 500 this year like Consumer Staples (XLP) would typically be considered defensive plays utilized when investors are prepping for an economic downturn.
“What we’re arguing is that that move [in stocks to start the year] is reflecting, one, conviction in the AI growth opportunity, but two, is also reflecting increased confidence in a soft landing,” Chronert said.
Multiple strategists have told Yahoo Finance this rotation likely has further to run if the economic outlook remains intact or improves. If, however, the outlook dampens, the “stealthy” rotation among sectors could shift once again, according to Charles Schwab chief investment strategist Liz Ann Sonders.
“If we were to see that economic growth deterioration, even if it meant that the Fed can justify starting to ease sooner and ease more aggressively, … even if you didn’t see a major corrective phase for the indexes, you would probably see under the surface a shift away from more cyclical areas, probably back to more defensive areas,” Sonders told Yahoo Finance.