Michael Scott got it all wrong
According to The Office, “There are four kinds of business: tourism, food service, railroads, and sales. And hospitals/manufacturing. And air travel.”
In fact, there are 11 kinds, at least in the eyes of Standard & Poor’s and the Global Industry Classification Standard (we’ll explain each below). Some sectors dwarf others. For instance, IT makes up nearly 30% of the US’s most widely recognized stock market index, the S&P 500. This makes a lot of sense when you consider that Apple and Microsoft are both classified as IT companies, and they have a combined market value nearing $6 trillion.
But why divide the business world into sectors at all?
Well, pies need slicing, and layered dip is superior to regular. Plus, classifying companies in a clear way allows investors, media people, government officials, and everyday joes to discuss the global economy using a common language with mutually-agreed-upon definitions. It also allows us to measure growth and decline at the industry level, which comes in handy during rapid economic shifts.
Identifying and analyzing various sectors also makes it easier to invest in (or simply watch) high-growth vs. low-growth industries. In other words, understanding the sector breakdown of the stock market could potentially make you money, or at least help you pick a professional field that isn’t actively going kaput. More on all that in just a moment.
By the digits
-7%: How the worst-performing S&P sector, utilities, has performed thus far in 2023
11: Sectors in the S&P 500
28%: Portion of the S&P 500 that IT makes up
$35 trillion: Approximate market cap of the entire S&P 500, including all 11 sectors
55%: How much the best-performing S&P 500 sector, IT, has risen thus far in 2023
163: Officially recognized sub-industries in the S&P
You get a sector, you get a sector!
A sector for everything, everything in its sector
The S&P 500, the leading benchmark of the US stock market, is comprised of 11 distinct sectors, each with its unique dealio.
IT. Dominated by tech giants like Apple, this sector leads with innovations in hardware, software, and privacy infringement.
Communication services. Encompassing media, telecommunications, and internet services, companies like Verizon enjoy a permanent lien against your paycheck. Google and Meta are in this category, too.
Financials. This sector includes banking, insurance, and investment firms.
Healthcare. Major pharmaceuticals, biotech companies, and healthcare providers make up this sector, including Johnson & Johnson and Merck.
Consumer discretionary. Companies providing non-essential goods and services, such as Amazon, Disney, and your favorite burrito chain fall under this category.
Consumer staples. Triscuits. Tide Pods. Weird bottom-shelf shampoo. The consumer staples industry includes food and household items, with Procter & Gamble and Coca-Cola carrying weight.
Real estate. Real estate investment trusts (REITs) and property management firms define this sector and wish to remind you rent is due on the 1st.
Materials. These companies produce raw materials like metals, chemicals, cotton, plastic, logs, the smelly stuff they use to pave roads—you name it. Think Dow and DuPont.
Industrials. This sector spans aerospace, defense, machinery, transportation, and anything else STEM majors get interested in. Boeing and 3M hang out here.
Utilities. These companies provide essential services like electricity and water, and include stalwarts like NextEra Energy, Dominion, and Duke Energy.
Energy. Dominated by oil and gas companies like ExxonMobil and Chevron, this sector is crucial for supplying the world’s energy needs and causing climate change.
Look at this!
Check out this clever, clear visualization of the sectors of the S&P 500.
Battle of the behemoths
AirPods and urgent care = $$$
The IT sector’s dominance in the S&P 500 is a reflection of how much time we spend on our phones in the bathroom at parties, on the couch lounging, or at family dinners pretending to text important messages while actually googling “how to escape family dinners.”
The next largest sector is healthcare, because that 10-minute Zoom with a nurse in Minnesota ain’t free, but at least she wrote you a Z-Pak script. Some of the smallest sectors, including energy—would you believe oil prices are volatile—and real estate tend to be capital-intensive and subject to fluctuating commodity prices and Federal Reserve decisions.
Sector secrets are sort of fun
Insight that could make you money—maybe
In a world where too many things are happening all the time, a grasp of sectors transforms the intricate and abstract into the legible, making the financial landscape intelligible and approachable for everyone. All of a sudden, you can identify which kinds of businesses are ascendant and which kinds are sinking away to nothing.
What’s more, you will finally understand what TV talking heads mean when they discuss “sector rotation.” This is a fancy phrase for when money managers take funds out of sectors in decline and put it into sectors with higher growth rates. For example, when Wall Street types see unemployment rising, they tend to shift dollars from consumer discretionary to consumer staples, betting that people will forgo Disney vacations but not Fritos.
There’s a potential investable angle in all this for you, too. You can bet your savings on individual sectors if you so choose. For instance, ETFs (exchange-traded funds, i.e., investment vehicles comprised of relevant assets) that track the IT sector have rocketed up around 30% thus far in 2023. At the very least, you’ll gain a sense of the major parts and aspects of the global economy, and that isn’t nothing.
Of course, not everyone feels that sectors are investment-worthy. Some people are bulls but industry-agnostic.
“I really don’t pay any attention to individual sectors, I just want to make a bet on capitalism and humanity over the next several decades.”—Morgan Housel, New York Times bestselling author of The Psychology of Money and Same as Ever, in an Instagram DM with Quartz
Is Netflix classified as a communication services or consumer discretionary company?
The answer isn’t classified. Find it at the bottom of this email.
1957: The S&P 500 market index is introduced.
1999: Morgan Stanley Capital International and Standard & Poor’s launch the Global Industry Classification Standard, now used to identify and describe the nature of nearly every publicly traded business in the world.
2007: Michael Scott identifies the REAL four kinds of business on an episode of The Office.
2015: The GICS and S&P recognize a new sector, real estate.
2018: S&P reclassifies Google and Meta within communications services, rather than IT, an event sometimes referred to as “The Great De-FAANGing.”
Cigarette giant Altria is classified as a consumer staple, not consumer discretionary. Costco and Dollar General are also considered consumer staples.
Which of these should be the 12th sector in the S&P 500?
- Nail care
- Gig economy services/Substack
- Weird crap you buy on Amazon at 2am
Which would you include? The investors are waiting.
💬 Let’s talk!
🐤 X this!
The correct answer to the pop quiz is communication services. We know. It’s weird.
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