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While the S&P 500 continues to trade at all-time highs and valuations appear expensive, is it possible to improve diversification by identifying sectors that are likely to outperform the S&P 500 in the coming months? Vincent Gann provided a systematic answer to this question. The study was conducted on the 11 “major sectors” of the S&P 500 Index.
Analysis method for the 11 major sectors of the S&P 500 Index: CAPE ratio + net profit margin + average medium and long-term technical assessment
-1 Shiller Multiplier CAPE Ratio
The CAPE ratio measures market valuation levels by comparing prices to average real earnings (adjusted for inflation) over a 10-year period.
The ratio helps smooth economic and accounting cycles and is primarily used to evaluate long-term prices in the market. Historically, higher CAPE ratios have been associated with lower returns in future years.
-2 net profit margin
An industry’s net profit margin measures the average profitability of companies in that industry, that is, the portion of revenue that remains net profit after deducting all costs. At an industry level, this represents a weighted average of companies’ net profit margins (usually weighted by market cap). (
-3 average medium and long-term technical evaluation
Technology assessment to determine trend maturity based on classifications as “early,” “mature,” and “late.” From a technical analysis perspective, potential outperformance opportunities are greatest in the “Early” and “Mature” categories. This classification is based on technical analysis of weekly and monthly charts.
By combining these three criteria, the goal is to identify industries with reasonable valuations, sufficient structural profitability, and technological momentum that can still be leveraged. This approach is designed to avoid sectors that are experiencing strong earnings growth but are technically overvalued later in the cycle.
Sales and profit growth data show that recent performance has been mainly concentrated in the technology sector, followed by the industrial sector. However, these industries are also among the most expensive in terms of CAPE ratios, limiting their ability to achieve relative outperformance in the medium term despite high margins and strong earnings growth.
The table below shows the results of this analysis. The best opportunities exist in low-rated industries with above-average net margins and technical ratings that do not fall into the lagging category (see CAPE ratio).
In contrast, several other industries showed a more balanced picture. Financials outperformed, with CAPE ratios well below average, net margins strong, and the technical picture remaining favorable. Valuations in defensive sectors like consumer staples and health care are also more modest, with early technical ratings suggesting sectors could shift in their favor if the economy slows or volatility rises.
The real estate and utilities sectors also deserve special attention. Although their earnings growth has been more modest, higher margins and valuations have become more attractive after a few quarters of underperformance, which could make them credible candidates.
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