We spend a lot of time talking about the market’s most important stocks and sectors – and for good reason. They matter. They move the needle.
But what’s the real answer to the question: Which sector is the most important in America?
You could start with Technology. It makes up more than 35% of the S&P 500, easily the largest weighting.
And if you study every bull market over the past 100 years, one thing jumps out immediately: Technology leads in almost all of them.
It’s hard to argue against Tech as the market’s most important sector.
But here’s the thing: We don’t get bull markets without Financials.
I came into this business before the Great Financial Crisis, and that 2007-09 period permanently underscored the importance of bank stocks.
Around the world, the major country indexes are dominated by Financials. Israel, Taiwan, and the Netherlands have some tech-heavy exposure, but they’re the exceptions.
Everyone else? Banks run the show.
Even here in the U.S., Financials are a big deal – the second-largest sector in the S&P 500 and the biggest component of the Dow Jones Industrial Average at more than 27%.
So yes, Tech matters. Financials matter. We don’t get bull markets without them.
But are they the most important sectors?
Industrials: The Most Important Sector
When you actually run the numbers, something interesting jumps out: Of all the S&P sectors, Industrials have the highest historical correlation with the S&P 500 itself.
In other words, if you define the “most important” sector as the one that moves most closely with the overall market, then Industrials are your winner.
And there’s another twist: Industrials are far more diversified than the sectors everyone obsesses over.
In Technology, the top three stocks – Nvidia (NVDA), Apple (AAPL), and Microsoft (MSFT) – make up almost 40% of the entire sector.
In Financials, the top five – Berkshire Hathaway (BRK.B), JPMorgan (JPM), Visa (V), Mastercard (MA), and Bank of America (BAC) – also control more than 40%.
But in Industrials?
The largest component is GE (GE) at just 6%. Even if you add up the top 10 names, you still don’t reach that 40% level.
This sector is a true mix: heavy machinery, engineering firms, railroads, airlines, trucking companies, waste management, staffing services – the nuts and bolts of the American economy.
And yesterday, large-cap Industrials (XLI) didn’t just show up, they closed at new all-time highs. Small-cap Industrials (PSCI) confirmed the move with new all-time highs of their own:
This is leadership from what is, mathematically, the most important sector in America.
For the record, large-cap Financials also closed at new all-time highs:
Cyclicals are working again.
Both Industrials and Financials had been consolidating for a few months, digesting those monster gains off the spring lows.
But this week, it sure looks like they’re starting the next leg of this bull market.
Industrials: Leaders Leading
If Industrials look good, it’s hard for the market as a whole to roll over.
That’s not opinion. That’s math.
And if you want a sideshow version of this group, look no further than the Dow Jones Transportation Average.
Every stock in the Dow Transports is already inside the S&P Industrials sector.
I get that it sounds funny – “All the Transports are Industrials.”
But yes, airlines, logistics companies, truckers, railroads – they all live inside the Industrials bucket.
And remember when everyone was laughing at me back in early November, when I said Transports were coming?
Well, the Dow Transports just closed at new 52-week highs yesterday. And they’re on pace for the highest weekly close in history.
Do you think we get it now?
Either way, the trend in Industrials is up. And the Transports are pushing from behind.
We’re long. And we’re getting longer.
Because when the leaders lead, you don’t hide. You press.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs