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Market Memo

SECTOR ROTATION INTELLIGENCE  ·  WEDNESDAY, 13 MAY 2026 

► CURRENT POSITIONING: Cycle: LATE EXPANSION

Overweight: XLE · XLK · XLI
Underweight: XLV · XLF · XLY

SPY738.74+0.19%

UST 10Y4.46%+5bp

DXY98.3−0.02%

VIX18.1−0.3

GOLD$4,712−0.30%

WTI$101.48+3.4%

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MORNING BRIEFING

Six Sectors Are Bleeding Out While Three Hold the Index Together

The S&P 500 sits at 7,425 and the headline looks fine. It is not fine.

We got the April CPI print yesterday. Core CPI rose to 2.8% year-over-year. That is the highest reading since September. The Fed holds rates at 3.50–3.75% and cannot move. The 10-year yield pushed to 4.46% — up 5 basis points on the day. Inflation is not cooperating with the soft-landing story.

Meanwhile, the Strait of Hormuz remains functionally closed. WTI crude broke $101 a barrel yesterday and held it. That is not a speculative spike — it is a pricing of real physical scarcity. Every barrel that cannot move through that strait has to move another way, at higher cost. Energy inflation is now structural until there is a resolution, and there is no resolution in sight.

The rotation data makes the picture clear. XLK, XLE, and XLI are the only three sectors sitting in the LEADING quadrant. Together they are keeping the index above water. The other eight sectors — everything from financials to healthcare to utilities — are underperforming SPY on a composite 1M/3M basis. XLV sits at the bottom of the table with an RS score of −6.45. Healthcare, the sector that traditionally tells you when late cycle is turning to contraction, is dead money right now.

What does it mean when the defensive sectors don’t rotate up? It means the market is not pricing a recession. It means capital is still chasing growth and real assets and leaving the traditional safety plays behind. Consumer sentiment is at 48.2 — an all-time low since the University of Michigan started reporting in 1952. That is a Main Street reading, not a Wall Street reading. The market and the consumer are in different buildings right now.

THE BIG PICTURE

We are in late expansion. GDP at +2.0%, ISM at 52.7, payrolls at +115K — the data still says growth. But inflation is sticky at 2.8% core, the Fed is pinned, and the 10-year is at 4.46%. The clock is running. The market is pricing a world where AI investment and energy scarcity keep two sectors elevated while everything else grinds sideways. That is a fragile foundation. Breadth this narrow at index highs eventually resolves — either the laggards catch up or the leaders come down to meet them.

SECTOR ROTATION TERMINALPERFORMANCE HEATMAPvs SPY · May 13, 2026TICKERSECTOR1W1M3M6MXLEEnergy+3.8%−3.0%+7.0%+10.0%XLKTechnology+0.4%+7.5%+4.2%+2.0%XLIIndustrials0.0%+0.5%+1.2%−2.0%XLBMaterials+0.4%−1.5%+0.1%−4.0%XLCComm Services+0.1%−2.5%−2.0%−8.0%XLFFinancials−0.3%−2.0%−3.9%−10.0%XLYCons Discretionary−0.4%0.0%−4.8%−13.0%XLREReal Estate−0.5%−0.5%−3.8%−10.0%XLUUtilities−0.4%−4.0%−4.8%−10.0%XLVHealthcare−0.2%−7.0%−5.9%−13.0%XLPCons Staples0.0%−3.0%−5.8%−6.0%RELATIVE STRENGTH RANKINGcomposite RS vs SPY#TICKERSECTORRSDIRQUAD1XLKTechnology+5.85▲LEADING2XLEEnergy+2.00▲LEADING3XLIIndustrials+0.85▲LEADING4XLBMaterials−0.70▲IMPROVING5XLREReal Estate−2.15▼LAGGING6XLCComm Services−2.25▲IMPROVING7XLYCons Discretionary−2.40▼LAGGING8XLFFinancials−2.95▼LAGGING9XLUUtilities−4.40▼LAGGING10XLPCons Staples−4.40▼LAGGING11XLVHealthcare−6.45▼LAGGINGROTATION MAPperformance quadrants

■ WEAKENING— none this week —

■ LEADINGXLKTechXLEEnergyXLIIndustrials

■ LAGGINGXLREReal EstateXLYCons DiscXLFFinancialsXLUUtilitiesXLPStaplesXLVHealthcare

■ IMPROVINGXLBMaterialsXLCComm SvcsECONOMIC CYCLE OVERLAYphase estimate

RECOVERY

EARLY EXP

LATE EXP ◄

CONTRACTION

SECTORS HISTORICALLY FAVORED

XLE EnergyXLB MaterialsXLI IndustrialsXLK Technology*

WHAT LATE EXPANSION MEANS

GDP at +2.0%, ISM at 52.7, payrolls at +115K — the expansion continues. But inflation is re-accelerating (Core CPI 2.8%), the Fed is on hold at 3.50–3.75%, and the 10-year is pressing 4.46%. Growth slowing, inflation sticky, money tight — that is the late-expansion fingerprint. Energy and hard assets historically lead here. Technology is outperforming for structural AI reasons, not the traditional playbook. Defensives are dead money — the market is not pricing recession — but consumer sentiment at 48.2 is the lowest reading since 1952. Technology’s inclusion reflects the current AI capital cycle overriding the typical late-expansion rotation.

WHAT THE ROTATION IS TELLING US

WATCH

XLK at RS +5.85 with 10-year yields at 4.46% — momentum vs. valuation

Technology is the dominant force in this market. XLK’s RS score of +5.85 leads the table by a wide margin, and the 1-month relative return of +7.5% reflects April’s AI euphoria — Nvidia’s CEO joining the China summit and the prospect of resumed chip exports drove tech to near-vertical gains. The problem is that XLK trades at 41x earnings while the 10-year yields 4.46% and core CPI just re-accelerated to 2.8%. The discount rate is not going lower. If the 10-year breaks 4.60%, expect multiple compression and a fast rotation out of growth. The AI narrative is real, but momentum at overbought RSI levels in a rising-yield environment is a setup we watch, not chase. We hold the XLK overweight. We are not adding here.

BEARISH

XLV sits at rank 11 with a −6.45 RS score and no signs of recovery

Healthcare traditionally rotates into leadership as late expansion gives way to contraction. It is not rotating. XLV is dead last — RS −6.45, down 7.0% relative to SPY over one month and 5.9% behind on three. Capital is leaving, not accumulating. The sector’s earnings declined year-over-year in Q1 and structural headwinds are not clearing. When the traditional defensive rotation is this absent, either the market sees no recession risk or the market is wrong. We are not calling a recession. But rank 11 of 11 in a late-expansion regime is a number we do not ignore.

BULLISH

XLE posts +3.8% vs. SPY this week while oil closes above $101

WTI at $101.48 is not speculative — it is the Strait of Hormuz being functionally closed. XLE’s 1-week relative return of +3.8% confirms capital is moving into the physical energy complex right now. The 3-month relative of +7.0% shows the trend predates this week, and the 6-month relative of +10.0% makes energy the most durable outperformer in the portfolio. Every week the disruption holds compounds the global inventory deficit. With oil above $100 and the Fed unable to cut, XLE is the cleanest late-cycle position we have.

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THE BOTTOM LINE

The regime is late expansion. Three sectors — Technology, Energy, and Industrials — are carrying the index while six of eleven lag SPY on a composite basis, including every traditional defensive. Energy is the cleanest late-cycle trade: real assets, physical scarcity, the Fed unable to cut. Technology is earning its keep through the AI capital cycle, not the traditional playbook. The index says 7,425. The breadth says something narrower. We overweight XLE, XLK, and XLI. We stay light on XLV, XLF, and XLY.

Published daily 7:30 AM ET • Not financial advice

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