The third quarter of 2021 closed last week, so it’s time to take a look at quarterly sector performance. For reference, the S&P 500 returned 1.4% for the third quarter.

September was an especially bad month, with the S&P 500 falling 3.7% for the month. Nine of 11 S&P 500 sectors were down in September, with the Utilities sector getting hit hardest (-7.3%). The highlight of September was the Energy sector, which returned 14.3% for the month.

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Despite the pullback in September, gains in the previous two months helped eight of the 11 S&P 500 sectors to positive Q3 returns. Year-to-date (YTD) all S&P 500 sectors are in positive territory.

Let’s review the Q3 2021 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the quarter.

11 Sector Review

Select Sector SPDRs are targeted exchange-traded funds (ETFs) that divide the S&P 500 into 11 sector index funds. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, and Utilities. The 11 Select Sector SPDRs represent the S&P 500 as a whole.

The Financial sector has now reeled off four strong quarters in a row, coming out of last year’s pandemic dip. In Q3 it was the top-performing sector with a return of 4.4%, and over the past year it is the second best-performing sector with a return of 61.1%. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.A, BRK.B), JPMorgan (NYSE: JPM), and Citigroup (NYSE: C).

Technology has now notched two good quarters in a row, ending Q3 with a return of 2.8%. This sector includes technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment. Components of this ETF include Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), and Intel (NSDQ: INTC).

The Real Estate Index was the top performer in Q2, and remained the 3rd best sector in Q3 with a return of 1.9%. This index consists primarily of real estate management and development companies and real estate investment trusts (REITs). The sector was down in 2020 because of the pandemic, but it has been one of the top-performing sectors in 2021, returning 25.6% YTD. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

Despite the sharp decline in September, the Utilities sector still outperformed the S&P 500 with a 1.8% return for the quarter. The main headwinds for the sector are inflation fears and fear of rising bond rates. Companies that produce, generate, transmit or distribute electricity or natural gas predominantly make up the Utilities sector. Component companies include NextEra Energy (NYSE: NEE), Duke Energy (NYSE: DUK), and Dominion (NYSE: D).

The Health Care sector continues to recover from underperformance in 2020 and during the first quarter of this year. The sector followed up its strong Q2 return with a return of 1.5% in Q3. The Health Care sector includes health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Bellwethers in the health care sector include Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE).

After underperforming the S&P 500 for two consecutive quarters, the Consumer Discretionary sector beat the S&P 500 in Q3 by a fraction of a decimal point. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing. It is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS).

The energy sector exploded in September, which helped salvage the quarter. The sector was the top performer in the first half on 2021, but it was in correction mode early in the summer. Over the past year, the Energy sector is the top-performing sector, with a total return of 94%. That is primarily a reflection of last year’s deep COVID-19 induced plunge. Many energy companies have yet to recover to pre-COVID levels. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

Communication Services underperformed the S&P 500 for the quarter with a return of 0.8%. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media & services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).

The Consumer Staples sector was the first of a trio of losers in Q3 with a return of -0.7%. Making up this sector are companies involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).

The Materials sector was a little further back with a return of -1.9%. However, the sector did slightly outperform the S&P 500 over the past year with a return of 30.4%. This sector includes companies that produce chemicals, construction materials, metals and mining, and paper and forest products. Among its largest components are DowDuPont (NYSE: DWDP) and Sherwin-Williams (NYSE: SHW).

The Industrials sector was the worst performer in Q3 with a loss of 2.8% in Q2. However, the sector has outperformed the S&P 500 over the past year with a return of 31%. Component industries include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, and machinery. Important constituents of this sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

In summary, the market rally that began a year ago notably slowed in Q3, especially during September. Inflation resistant sectors continue to be among the best performers, and will likely continue to be favored in the second half of 2021.

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