S&P 500 Sector Performance: Mid-Year Review ’26

At mid-year, the S&P 500’s 11 sectors show clear differences in valuation, earnings strength, and investor expectations. Using data from State Street Global Advisors, we assess which sectors offer genuine relative value, which appear fairly priced, and which may leave little room for disappointment.

Data courtesy of State Street Global Advisors.

For readers new to this format, let’s walk through the first row to explain our methodology.

The SPY ETF (the S&P 500 tracker) has approximately $780 billion in assets under management, making it one of the largest passive ETFs in the world. It currently trades at a forward P/E ratio of 21.67, while analysts expect 3–5 year annual earnings growth of 18.43%.

This gives us our preferred valuation metric — the forward PEG ratio (forward P/E divided by expected earnings growth) — of 1.18. SPY also offers a 0.97% dividend yield, has delivered a 15.5% annualized return over the past 10 years, and has generated an annualized return of 10.83% since inception.

How We Measure S&P 500 Sector Performance – the PEG Ratio Method

Using the PEG ratio, we can broadly classify the S&P 500 sectors into three categories: cheap (PEG below SPY), fairly valued (PEG close to SPY), and expensive (PEG above SPY).

Only one sector currently has a PEG ratio below that of SPY: XLK (Technology). Based on this metric alone, Technology appears to be the cheapest sector.

Three sectors have PEG ratios relatively close to that of SPY — XLF (Financials), XLB (Materials), and XLE (Energy). We consider these sectors to be fairly valued.

The remaining sectors — XLY (Consumer Discretionary), XLC (Communication Services), XLV (Health Care), XLI (Industrials), XLP (Consumer Staples), XLU (Utilities), and XLRE (Real Estate) — fall into our expensive category.

Under normal circumstances, we would recommend overweighting the cheapest sector — in this case Technology — and perhaps selectively adding exposure to some of the fairly valued sectors, such as Financials, Materials, or Energy.

However, these are not normal times.

Why Technology’s S&P 500 Sector Performance Looks Deceptively Cheap

What concerns us is that expectations for the Technology sector are well outside historical norms. Since its inception in 1998, XLK has delivered an annualized return of approximately 10.84%, yet analysts are currently projecting nearly 32% annual earnings growth over the next three to five years. Moreover, these exceptionally optimistic expectations come after a decade during which the sector has already significantly outperformed its long-term average.

Our experience suggests that PEG ratios in the 1.2–1.3 range often indicate attractive valuations. However, when PEG ratios fall well below 1, the interpretation is not always straightforward. In our experience, such low ratios often suggest that investors are skeptical of analysts’ growth projections rather than signaling genuine undervaluation.

We do not believe there is sufficient evidence to conclude that investors should avoid Technology stocks or the S&P 500 sector ETFs altogether. However, we do believe there is enough evidence to suggest that current market expectations are exceptionally high, increasing the risk of future disappointment.

Which S&P 500 Sectors Are Cheap, Fair, or Expensive Right Now

• Cheap: XLK (Technology)
• Fairly valued: XLF (Financials), XLB (Materials), XLE (Energy)
• Expensive: XLY (Consumer Discretionary), XLC (Communication Services), XLV (Health Care), XLI (Industrials), XLP (Consumer Staples), XLU (Utilities), XLRE (Real Estate)

Looking at S&P 500 sector performance through this lens, only Technology screens as cheap on a PEG basis — and even that comes with the caveat outlined above.

Our Outlook: Bonds vs. Sector Performance Going Forward

At current valuations, we continue to prefer the safety and attractive yields offered by long-term government bonds over equity markets, where earnings growth expectations for the next several years remain well above their historical norms.

Overall, S&P 500 sector performance in 2026 reflects unusually high growth expectations, particularly in Technology. Until those expectations moderate or come with more supportive evidence, we believe the risk-adjusted case favors patience over broad equity exposure.

Disclaimer