S&P 500 Sector Indices Review: Sept 2025 Outlook
It has been nearly four months since our last review of the S&P 500 sector indices on May 7, 2025. A lot has happened since then. The S&P 500 itself is up almost 18%, the NASDAQ-100 has gained nearly 25%, and the Russell 2000 is just shy of 24%.
In other words, markets have rallied strongly. But rallies raise the same old question – what is cheap, and what is not?
To answer that, we once again compare the S&P 500 with its sector components. The data we use comes from State Street Investment Management, which tracks the sectors through their SPDR ETFs. These ETFs closely mirror the official indices, making the valuation metrics applicable to the S&P 500 sector indices themselves.
| Name | Description | AUM in Bln | Weight In S&P500 | Forward PE | Earnings Growth | PEG Ratio | Div Yield | 10 Yr Ann. Return | YTD Return |
| SPY | 660 | 100% | 24,8 | 11,81% | 2,10 | 1,19% | 14,45% | 10,70% | |
| XLK | Technology | 90,00 | 33,99% | 31,71 | 15,35% | 2,07 | 0,64% | 22,05% | 9,64% |
| XLF | Financial | 55,00 | 13,62% | 18,03 | 11,58% | 1,56 | 1,55% | 13,12% | 12,48% |
| XLY | Cons. Discr. | 24,00 | 10,68% | 30 | 7,74% | 2,72 | 0,80% | 13,19% | 3,81% |
| XLC | Communications | 28,00 | 10,63% | 20,75 | 9,26% | 2,10 | 1,01% | 13,00% | 15,68% |
| XLV | Health Care | 34,00 | 8,83% | 17,4 | 9,43% | 1,74 | 1,88% | 8,68% | 0,77% |
| XLI | Industrial | 23,00 | 8,26% | 26,85 | 12,79% | 2,10 | 1,32% | 13,50% | 16,05% |
| XLP | Cons. Staples | 15,00 | 5,02% | 20,07 | 4,89% | 4,10 | 2,78% | 8,33% | 4,03% |
| XLE | Energy | 27,00 | 2,93% | 16,72 | 10,07% | 1,66 | 3,40% | 7,34% | 7,18% |
| XLU | Utilities | 20,00 | 8,07% | 19,25 | 8,07% | 2,39 | 2,86% | 10,62% | 13,01% |
| XLRE | Real Estate | 8,00 | 1,92% | 39,86 | 9,32% | 4,28 | 3,32% | 7,12% | 4,01% |
| XLB | Material | 5,00 | 1,82% | 20,21 | 10,10% | 2,00 | 2,07% | 10,05% | 10,76% |
Reading the Numbers
Take SPY, the ETF that tracks the entire S&P 500. It has over $660 billion in assets and a forward price-to-earnings ratio of 24.8. Expected earnings growth over the next three to five years is 11.8%, giving it a forward PEG ratio of 2.1. That ratio is our benchmark. Sectors with PEG ratios below 2.1 appear relatively cheap, while those above are expensive.
Here’s how the landscape looks in September 2025:
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Cheap sectors: financials (XLF), energy (XLE), health care (XLV)
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Fairly valued sectors: technology (XLK), industrials (XLI), materials (XLB), and possibly utilities (XLU)
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Expensive sectors: real estate (XLRE), consumer staples (XLP), consumer discretionary (XLY)
Financials – Strong Value and Investor Confidence
The Financial Sector Index (XLF) stands out as the most affordable of the S&P 500 sector indices, with a forward PEG ratio of 1.56. The expected earnings growth of 11.6% aligns almost perfectly with what the sector has historically delivered, lending added credibility to the forecast. That consistency matters.
Additionally, financials attract some of the heaviest investor flows, with XLF holding $55 billion in assets, second only to technology. In other words, investors clearly believe in these numbers, and so do we.
Energy – Attractive Valuations but Caution Warranted
The energy sector index (XLE) also appears attractive, with a forward PEG of 1.66 and growth expectations of approximately 10%. However, the story is a little more complicated here. Over the past decade, annual returns have averaged just 7.1%, falling short of analyst optimism.
That doesn’t mean energy should be ignored – in fact, it deserves a place in diversified portfolios. Still, position sizes should remain modest, especially since energy makes up less than 3% of the S&P 500.
Health Care – Cheap for a Reason
Healthcare (XLV) trades at a forward PEG of 1.74, making it appear inexpensive on paper. The problem is the sector’s heavy exposure to government regulation, which often explains why valuations remain subdued. It’s not that health care can’t deliver returns, but the risks are unique and not always within the control of the companies involved. For that reason, we would rather overweight financials than healthcare, even if the valuation screens similarly as cheap.
Final Thoughts – Where We Stand
Looking across the S&P 500 sector indices, the market still offers selective value despite the strong rally. For us, that means:
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Staying overweight in financials (XLF), which combines value and stability
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Adding only a modest allocation to energy (XLE), given its cyclical nature and smaller index weight
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Remaining cautious on health care (XLV), where regulatory risks keep us on the sidelines
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Keeping broad exposure to SPY (S&P 500) and QQQ (NASDAQ-100) as the foundation of the portfolio
The goal isn’t to chase home runs but to keep hitting steady singles and doubles, building wealth over time with a margin of safety intact.