The S&P 500 is down 10% from all-time highs. How’d it happen?!?
A look at the industry groups that have driven the most downside and the pockets of the market relatively undisturbed by the broad downdraft is revealing.
Welcome to correction territory: after Thursday’s 1.4% retreat in the S&P 500, the benchmark US stock gauge is down more than 10% from its February 19 record closing high.
How did it happen? Well, quickly, for one. Per Bloomberg, the speed of this double-digit drop from all-time highs is the seventh-fastest going back to 1929.
A more granular breakdown looking at the S&P 500’s industry groups can provide some insight as to the nature of this sell-off.
When conditions seemingly turn on a dime, that probably means there’s a story that can be told about charts that looked amazing and now look abysmal. And yes, to make a broad overgeneralization, pockets of the market that have been crushing it over the past year are now getting crushed; areas that weren’t enjoying massive gains are among the most well-insulated from the selling. That’s a story primarily about the reversal in momentum stocks.
A few standout exceptions on the positive side include diversified financials, insurance, and telecom.
Autos are the worst-performing industry group since the S&P 500’s peak, and, of course, the “T” word is to blame here.
But that would be Tesla, not tariffs. The EV maker has cratered amid a retrenchment in the momentum trade, while the other two members of this cohort (GM and Ford) are down slightly and up modestly since February 19, respectively.
The bludgeoning in banks is perhaps the best signal of how fears about a US economic slowdown have contributed to the downdraft. Some mitigating factors: this group had received a ton of love and inflows right before markets peaked, which pushed valuation measures like price to estimated book for banks to near their highest levels over the past decade.
Semiconductors and equipment as well as tech hardware and equipment are two industry groups whose big declines speak to the scale of the breakdown in the AI- and momentum-linked trades.
Interestingly, the same goes for consumer staples distribution and retail. Two of the four underperformers within this cohort were big weights in the iShares MSCI USA Momentum Factor ETF: Walmart, whose bad guidance marked the starting point for all this pain, and Costco, which suffered a rough earnings miss.
On the other hand, the terrible performance of Target, consumer services (where cruise and travel stocks are getting crushed), and consumer discretionary distribution and retail points to a mix of growth fears accentuated by tariffs as drivers of massive downside.
While some retailers factored in some impact from tariffs and issued disappointing outlooks for the year ahead, others didn’t and yet still put out guidance that was on the light side, indicative of a dimming outlook for US consumers even without that additional headwind.
Software and services looks fairly ugly on this table — having done not as well as the benchmark US stock index over the past year and falling more during this sell-off — but a decent chunk of that can be put down to Palantir, which hadn’t been added to the S&P 500 (and this industry group) until late in Q3 2024.
By and large, the stocks that have offered safety during these rocky times are the ones considered to be more insulated from the ebbs and flows of the economic cycle. Even if times are tough, food, toilet paper, electric, and phone bills are going to be among the last things cut from a household budget. And, of course, most hadn’t performed well in the past year, which probably meant there weren’t a ton of bulls suddenly ditching their positions.
