By Jacob Sonenshine
The stock market's rally has left out several sectors that are becoming truly attractive.
Those sectors -- healthcare, financial and utilities -- have been in the shadow of the Big Tech companies that have pushed the indexes higher in 2026. The S&P 500 has gained 11% this year, driven by the VanEck Semiconductor ETF, up 69%. A few manufacturers such as Eaton and Vertiv Holdings have also boosted the broader market.
These companies are seeing exploding demand for products that build the data centers that the Big Tech services companies are investing in to house their artificial intelligence technology.
Also, let's not forget Apple's 13% gain for the year. It's hit a $4 trillion market capitalization, helping lift the S&P 500.
But only 283 stocks on the index were up for the year, as of late Monday morning, according to FactSet. That left 220 stocks in the red for 2026 -- and even more that were underperforming.
The low participation in the index's rally is historic. In the past three months, about a third of S&P 500 constituents have beaten the index, the lowest portion since at least 1999, according to Trivariate Research.
Think about it this way: As the data center buildout rages, investors have lost interest in the many non-data center stocks. Some of those are in economically-sensitive sectors, such as consumer discretionary, which has suffered from higher oil prices and interest rates.
The problem with buying more of the data center-exposed stocks now is that they are vulnerable. Sure, their rallies are well-founded, rooted in rising profit expectations, but when the Big Tech companies are finished investing in all the data centers they need, the chip makers and other manufacturers could see investors exhibit serious profit-taking -- or selling.
So it makes sense to scour for opportunities in areas that have charts that do not look as if they're at nosebleed levels. Buy sectors that have lagged but that have long-term profit growth drivers.
The State Street Health Care Select Sector SPDR ETF is down mildly this year. It trades at a tolerable valuation level -- just over 17 times next 12 months aggregate earnings that analysts forecast, according to FactSet. That's a 19% discount to the S&P 500's just over 21 times, particularly cheap, given the 14% discount the sector has averaged over the past five years.
That means, assuming healthcare multiples won't go much lower, rising earnings can bring the ETF higher over time. Analysts expect 15% annual growth of earnings per share for the fund from the end of this year through 2028. That starts with 5.5% annual sales growth, as Eli Lilly leads the charge in GLP-1s, and even other pharmaceutical companies such as Amgen get into the business. Elsewhere, UnitedHealth should bounce back from a tough 2026, as more seniors sign up for Medicare Advantage.
The overall revenue growth for the sector will help profit margins rise -- especially as healthcare companies use AI, helping them slim down certain expenses. UnitedHealth said it's doing so on its first quarter earnings release, an example of why analysts see the healthcare fund's operating margin rising.
Also look at the State Street Financial Select Sector SPDR ETF, which is in the red this year. It trades at 14.5 times earnings. While a handful of investment houses are suffering from private credit concerns, the ETF is diversified, as it owns all of the major investment banks and insurers.
The sector is one of the heaviest AI users. Analysts project rising margins that will help spark 11% EPS growth.
There's also the State Street Utilities Select Sector SPDR ETF, up just 1% this year. Some of its expected earnings growth comes from the additional data centers that require power.
It's a safer way to play AI. Many companies have long-term fixed contracts with data center owners, and many of the fund's holdings -- certainly its largest three, NextEra Energy, Southern Co. and Duke Energy -- have betas less than 1. All that means the stocks vary less than the market, making them less risky.
Anyone putting new money to work should consider these sectors.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 02, 2026 02:00 ET (06:00 GMT)
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