When the AI Trade Collapses, These 3 S&P 500 Sectors Are Your Best Bet

Technology accounts for more than one-third of the entire S&P 500 Index ($SPX). 

That’s not normal, and it makes me very worried. 

So, it’s time to start looking at the other 10 sectors of the S&P 500 to see what looks most likely to pick up the slack if and when the artificial intelligence (AI) trade finally loses steam. 

Sector ETFs, a Review 

1. Information Technology (XLK) 

• SPY Weight: 37%
• The Story: This sector is the absolute dictator of the index, single-handedly driving the headline averages via a hyper-concentrated group of AI infrastructure and semiconductor giants. The primary battleground here is whether corporate buyers will continue to fund multibillion-dollar R&D hardware buildouts indefinitely, or if a sudden slowdown in enterprise AI spending will trigger a violent re-rating.

2. Financials (XLF) 

• SPY Weight: 12%
• The Story: Financial institutions are caught in a multi-year tug of war. While elevated net interest margins have boosted standard banking revenue, sticky short-term interest rates and lingering commercial real estate credit exposure are forcing desks to aggressively accumulate loan-loss provisions. That makes them prime beneficiaries of lower rates, which I think will start to happen before this year ends. It will have to include a calming of the Iran-related hostilities. If not, oil prices remain elevated, as does inflation, which in turn crimps corporate profit margins. 

3. Communication Services (XLC) 

• SPY Weight: 10%
• The Story: This sector has effectively become an extension of the Big Tech trade, heavily dominated by digital advertising and search monopolies. The main debate revolves around how efficiently these mega-caps can layer generative AI into their legacy search, social feed, and streaming algorithms to sustain high-margin ad revenues as global consumer discretionary spending softens.

4. Consumer Discretionary (XLY) 

• SPY Weight: 9%
• The Story: The big story here is consumer elasticity. After years of coping with sticky inflation, the average shopper is officially exhausted. Stocks are increasingly under severe pressure across retail, apparel, and automotive giants as consumers aggressively pull back on big-ticket discretionary items. Perhaps not at the top of the so-called “K-shaped economy,” but elsewhere. 

5. Health Care (XLV)

• SPY Weight: 9%
• The Story: The healthcare sector is in the midst of a massive reset. Following an emotional panic where weight-loss drugs (GLP-1s) were expected to eliminate the need for global medical procedures, capital is quietly flooding back into medical device makers, surgical suppliers, and hospital operators as elective procedure backlogs hit record highs.

6. Industrials (XLI) 

• SPY Weight: 10%
• The Story: Aerospace, defense, and heavy machinery firms are benefiting from a multi-year secular trend of deglobalization, manufacturing reshoring, and defensive government spending. However, the cyclical nature of these businesses means forward guidance is fighting a direct headwind of elevated borrowing costs and slowing global freight volumes.

7. Consumer Staples (XLP) 

• SPY Weight: 5%
• The Story: Food, beverage, and household products giants have officially hit a pricing power wall. Their internal input costs — labor, transport, and energy — remain stubbornly high. Because they can no longer raise shelf prices without triggering a complete collapse in sales volume, corporate profit margins are under acute pressure as consumers migrate to private-label generic store brands.

8. Energy (XLE)

• SPY Weight: 3%
• The Story: Energy has shrunk to a tiny fraction of the index. Heck this sector was once the biggest in the S&P 500. Still, it remains the ultimate wildcard. The narrative is entirely about supply deficits emanating from the Strait of Hormuz situation. Maritime shipping lanes and physical oil infrastructure has already been impacted, making me wonder if there’s a boomerang effect coming, based on what’s already transpired. It is not out of the question that energy stocks could once again become a double-digit percentage allocation with the S&P 500 Index. That would take a combination of higher oil prices and falling stock prices in other sectors. Neither alone would do it, in my view.

9. Utilities (XLU) 

• SPY Weight: 2%
• The Story: Utilities have transformed from boring, income-oriented bond proxies into an aggressive, secondary AI infrastructure trade. The narrative is all about the power grid: artificial intelligence data centers require an unprecedented, compounding amount of electricity, triggering a massive capital expenditure cycle for these firms. That also means this formerly sleepy sector is not the bond substitute it traditionally has been.

10. Real Estate (XLRE) 

• SPY Weight: 2%
• The Story: Real estate is pinned near the bottom of the index, thanks to the high-interest-rate environment we’ve had for going on five years now. The urgent debate here focuses on the hundreds of billions in commercial real estate debt maturing over the next 18 months, forcing real estate investment trusts (REITs) to refinance legacy, cheap liabilities at double the cost of what they borrowed last time around. 

11. Materials (XLB) 

• SPY Weight: 2%
• The Story: Chemical, packaging, and mining operators are dealing with a severe global manufacturing slowdown. The primary narrative centers on whether infrastructure spending and domestic chip-foundry construction can offset a persistent global de-stocking cycle and a cooling raw commodity tape.

Here Are the Best 3, Chart-Wise 

Put a giant asterisk on this one. Because increasingly, I think the bond market (level of interest rates) drives all of this. Especially with the AI trade being increasingly about the biggest companies on the planet borrowing capital. 

XLU

I’m going to count on this one carving out a bottom. That percentage price oscillator (PPO) indicator has not turned upward yet, but it has at least flattened out. Good enough in this environment. 

XLP

I actually think that XLP is a rare case these days. The ETF looks “just OK,” but some of the individual stocks in it, the higher weighted ones, might look much better. 

XLV

See above on how this sector is doing a great job of mounting a recovery. That said, the trick here is to also determine if the sector as a whole will rally, or if it is a subset that will make its move solo. In the case of healthcare’s medical devices sub-sector, the iShares US Medical Devices ETF (IHI) is one I’ve covered for Barchart recently. 

No sector ETF looks thrilling to me currently, but after the run we had in a tech-led melt up, identifying this trio of potential slow-but-steady climbers near term is a moral victory. 

The takeaway of most importance here: don’t just settle for watching the S&P 500. The 11 sectors of that index are the best sum of the parts of the approach to investing I can think of. And they are easy to follow here at Barchart. 

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob’s written research, check out ETFYourself.com.