VettaFi’s Head of Research Todd Rosenbluth hosted a joint webcast Wednesday with State Street Investment Management, bringing together three of the firm’s strategists to assess the current macro environment and where sector opportunities are emerging.
Matthew Bartolini, global head of research strategists at State Street Investment Management, said the moment calls for a deliberate approach to sector exposure.
“I think right now this speaks to the idea of including some form of sector rotation or sector biases in portfolios because the world is continuing to get more complex,” Bartolini said.
U.S. corporate earnings grew roughly 22% year over year last quarter, the strongest pace since 2021, according to Bartolini. He projected AI capital spending will add about 100 basis points to U.S. GDP growth in 2026.
But the macro picture is not entirely clean. U.S. producer and consumer prices have returned to their hottest levels since 2022, Bartolini said. “Super core CPI,” which strips out housing and energy, has also climbed above 3%, suggesting inflation extends beyond energy alone.
Sector Headwinds Grow as Rate Expectations Shift
Starting June 11, about 6.4 million consumers will travel to watch 104 soccer matches across the U.S., Canada, and Mexico, according to Bartolini. That influx will generate an estimated $6.5 billion in tourism spending. That demand is expected to put further pressure on airfare, restaurants, and lodging, all areas already showing up in recent CPI readings.
Federal Reserve minutes released during the webcast showed Federal Open Market Committee members actively debating potential rate hikes, Bartolini said. Markets had priced in roughly 60 basis points of year-end rate cuts earlier this year. That expectation has since been erased. Long-term U.S. Treasuries have touched their highest rates since 2007.
Anqi Dong, global head of sector strategy at State Street Investment Management, described the current backdrop as a “fragile balance.” Strong fundamentals remain, but market leadership has narrowed.
Technology alone drove more than half of market gains since the March lows, she said. Communication services was the only other sector to outperform the broader market during that stretch. Together with the rate environment, there is growing risk of rotation going forward.
On valuation, energy stands out as the most attractively priced sector in the market on both an absolute and relative basis, according to Dong, even as its near-term performance has lagged its underlying fundamentals. Industrials and technology, meanwhile, are trading in the top quintile of their 15-year historical valuation ranges.
Pairing Sectors to Spread Risk
Kevin Abbott, senior sector research strategist at State Street Investment Management, made the case for building sector exposure in pairs rather than standalone positions.
The first combination pairs technology with utilities at a 50/50 split. Since the launch of ChatGPT in late 2022, that blended portfolio has produced lower volatility than holding technology alone while outperforming the S&P 500 on an annualized basis, according to Abbott.
Abbott said utilities are on pace for double-digit earnings growth in 2026, which would top the sector’s 10-year average for the third straight year. Rising electricity demand from data centers is driving that growth.
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The second pairing puts energy alongside industrials. Abbott described these sectors as holding “hard assets and revenue streams that are less likely to be disrupted by artificial intelligence,” making them a way to capture geopolitical and defense tailwinds while diversifying away from AI-concentrated positions. Global military spending reached a record $2.6 trillion last year.
Four AI hyperscalers, which Abbott defined as Amazon.com, Inc. (AMZN), Alphabet Inc. (GOOGL), Meta Platforms, Inc. (META), and Oracle Corp. (ORCL), are projected to spend $690 billion on capital expenditures this year and more than $800 billion in 2026, with industrial and utility firms positioned as direct beneficiaries of that buildout.
Dong noted that the State Street sector ETF suite, first launched in 1998, offers direct access to each strategy. The lineup includes the State Street Industrial Select Sector SPDR ETF (XLI), the State Street Energy Select Sector SPDR ETF (XLE), the State Street Utilities Select Sector SPDR ETF (XLU), and the State Street Technology Select Sector SPDR ETF (XLK).
A closing audience poll showed energy led investor interest at 39%, followed by technology at 31%, with industrials, utilities, healthcare, and materials each drawing interest from more than 20% of respondents.
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