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How the S&;P 500’s Sectors Could Perform in 2020

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So far in 2019, the S&P 500 Index (SPY) has gained 28%. Technology stocks constituted 22.8% of SPY, the highest among the 11 major sectors. The Technology Select Sector SPDR Fund (XLK) has risen 47.2% this year and outperformed other sector-specific SPDR ETFs.

Phase one of the US-China trade deal helped the broader market and particularly tech stocks. The US and China are engaged in talks for phase two of the trade deal. The optimism surrounding trade talks could be a bullish driver for XLK.

Which sector underperformed?

The Energy Select Sector SPDR Fund (XLE) has risen 8% in 2019 and underperformed other sector-specific SPDR ETFs. However, things might change in 2020 for the energy sector. Key indicators suggest further upside in oil prices. However, natural gas prices’ weakness could continue in 2020. This factor might limit energy stocks’ upside, which has significant exposure to natural gas production.

This year, the Health Care Select Sector SPDR Fund (XLV) has more than doubled XLE’s rise. However, XLV saw the second-smallest gain among the sector-specific SPDR ETFs. Healthcare stocks constitute 14.1% of the S&P 500 Index. Healthcare stocks could be sensitive to the 2020 presidential election.

Democratic presidential candidate Joe Biden believes, “Because of Obamacare, over 100 million people no longer have to worry that an insurance company will deny coverage or charge higher premiums just because they have a pre-existing condition – whether cancer or diabetes or heart disease or a mental health challenge.”

Democratic presidential contender Elizabeth Warren supports Medicare for All. Warren proposed a healthcare coverage system for all, regardless of a person’s ability to afford the expenses. This program could significantly impact the US healthcare system.

President Donald Trump has differing views on the Affordable Care Act. During the 2016 presidential campaign, he vowed to repeal the ACA. In April, Trump tweeted, “Everybody agrees that ObamaCare doesn’t work. Premiums & deductibles are far too high – Really bad HealthCare! Even the Dems want to replace it, but with Medicare for all, which would cause 180 million Americans to lose their beloved private health insurance.”

How defensives could perform in 2020

If the US economy grows at a higher rate in 2020, investors might not be bullish on defensives and high-dividend-yield sector-specific ETFs, including the Consumer Staples Select Sector SPDR Fund (XLP), the Utilities Select Sector SPDR Fund (XLU), and the Real Estate Select Sector SPDR Fund (XLRE). These three sectors together constituted 13.5% of the S&P 500.

XLU and XLRE could be also sensitive to the Fed’s moves on interest rates. CME Group’s FedWatch Tool suggests that traders don’t expect any rate cuts in 2020. XLU and XLRE are high-dividend-yield ETFs. Often, investors prefer these sector-specific ETFs when interest rates decline.

S&P 500’s 2020 target

Among the Wall Street strategists surveyed by CNBC, John Stoltzfus of Oppenheimer has a target of 3,500 for the S&P 500 in 2020. Mike Wilson of Morgan Stanley sees the S&P 500 Index at 3,000 level next year. The S&P 500 at a 3,000 level would mean a fall of approximately 7% from Tuesday’s closing level. Strategists at Citigroup, Credit Suisse, and Goldman Sachs have targets of 3,375, 3,425, and 3,400, respectively, for the S&P 500 next year.

To learn about how specific stocks might look next year, please read Goldman Sachs’ Best Stock Picks for 2020.

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