The law of averages is a powerful thing … especially when it comes to investing.
Stocks and sectors that outperform for an extended period of time often regress to the mean, sometimes violently, when people least expect it. On the flip side, stocks and sectors that have underperformed for months or even years start to get noticed by bargain hunters and play catch-up, even if it’s a bit more gradual.
Take healthcare stocks, for instance.
In 2024, they were the second-worst-performing sector in the S&P 500, with a mere 2.6% gain. This year, healthcare stocks have risen more than 9% – admittedly only middle-of-the-pack among the 11 S&P sectors, but a big improvement.
In 2023, utility stocks were by far the weakest sector, down 7.1%. Last year utilities were up 23.4%; this year they’re up another 13%, putting them among the top five best-performing sectors in each of the last two years.
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Even more extreme: In 2020, energy stocks lost more than a third of their value (-33.7%); the next year, they were the best-performing sector, advancing 54.6%.
In fact, going back to 2010, the worst-performing sector in a given year has improved its performance by an average of 17.1% the following year. In nine of the 14 years in our study range, the worst-performing sector one year was one of the five best-performing sectors the next. That bodes well for the two sectors that are currently neck and neck for the worst-performing sector of 2025: consumer staples (-0.8%) and real estate (-0.4%).
Outperformers Due for a Reckoning?
On the flip side, outperforming sectors tend to outperform for longer. But when their comeuppance arrives, it’s almost always steep.
The information technology sector, for instance, has dominated – and often carried – the market over the last decade. But there have been some true rough patches along the way.
To wit: After advancing more than 30% every year from 2019-2021, the information technology sector lost 28.2% of its value in 2022. Prior to that, a 38.2% run-up in 2017 was followed up by a narrow (-0.3%) loss in 2018. Keep those in mind as the sector closes in on its third consecutive year of better than 25% gains.
While I wouldn’t necessarily bet against info tech. or communication services stocks (+20% in each of the last three years) in 2026 – as my former colleague Tim Lutts was fond of saying, “trends on Wall Street last much longer than anyone expects” – the downtrodden real estate and consumer staples sectors have far better risk/reward setups, given the 15 years of history I just outlined.
So as we enter a new year, keep a close eye on those two sectors for opportunities – especially real estate, which should start to get a boost after the Fed’s third rate cut in as many months yesterday.
What goes up must come down? That’s not always the case with stocks, as the market rises by an average of roughly 10% a year over time. But what goes down must come up? That’s much closer to the truth.
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