U.S. sectors diverge sharply over three sessions
At the close on October 23, 2026, the SPDR S&P 500 ETF Trust (SPY) had fallen 1.18% over three trading sessions, while the gap between sector performances widened sharply. The Energy Select Sector SPDR Fund (XLE) gained 2.00%, while the Communication Services Select Sector SPDR Fund (XLC) fell 4.25%—a 6.25 percentage-point difference.
The move was not simply a broad-based market sell-off. Investors continued to find opportunities in selected areas, but the market’s previous leadership began to fragment. Relative performance across sectors and industries became more important than the index’s headline move.
Energy was the strongest performer among the 11 major sectors. Utilities rose 1.62%, while consumer staples, real estate, financials and materials also posted gains. Communication services, consumer discretionary, industrials and technology lagged the S&P 500.
Three sessions are not enough to establish a durable sector rotation. The next test will be whether the strongest groups can maintain their relative advantage and whether weaker sectors continue to lag if the broader market rebounds.
Communication services falls for a third straight session
XLC declined on each day from October 21 through October 23, with daily losses of 1.11%, 1.42% and 1.78%. The selling pressure intensified from one session to the next.
After Meta Platforms announced additional financing plans and pledged to increase artificial-intelligence investment, investors began reassessing the scale of capital required to build AI infrastructure, the cost of that funding and the potential returns. Meta and other AI-related companies came under selling pressure as concerns grew over whether such large infrastructure commitments can generate sufficient earnings.
Telecom companies were also affected by developments related to potential new competition in wireless communications. However, communication services is a broad group that includes digital advertising platforms, traditional telecom operators and entertainment companies. Weakness in XLC therefore does not imply that all of its constituents face the same operating challenges.
The next indication will be whether XLC can regain ground against SPY after the initial selling pressure eases. Continued underperformance during a broader market rally would provide stronger evidence that the sector’s recent weakness is becoming more persistent.
Higher oil prices lift energy, but company exposure varies
Energy’s three-session gain was driven largely by a strong performance on October 23, when XLE rose 2.60%. Brent crude briefly reached about $116.72 a barrel that day as concerns increased that Middle Eastern supply could be disrupted.
Higher oil prices can improve earnings expectations for some producers, but the benefit varies significantly by company. Operating costs, refining exposure and asset mix all affect how much of an oil-price increase ultimately reaches cash flow and profit.
ETF flows within the energy complex were also uneven. XLE attracted new subscription money, while some exploration-focused products recorded outflows. Sector strength therefore does not mean every related investment product is attracting demand, nor does it imply that every asset in a strong group is at an attractive entry point.
For market participants, a pullback that holds support and draws fresh inflows may provide more confirmation of a trend than simply following a one-day surge. Longer-term assessments still depend on commodity prices, corporate cash flow, valuation and balance-sheet conditions.
Software gains while semiconductors retreat
The split within technology was even more pronounced. The Technology Select Sector SPDR Fund (XLK) fell 1.19% over three sessions, but its industry groups moved in opposite directions. The VanEck Semiconductor ETF (SMH) declined about 3.51%, while the iShares Expanded Tech-Software Sector ETF (IGV) gained about 3.42%—a gap of nearly seven percentage points.
The divergence shows that investors are no longer treating technology as a single trade. They are distinguishing between companies that require sustained, expensive AI infrastructure spending and technology businesses with different revenue models, margins and capital requirements.
Semiconductor weakness cannot yet be read as a complete abandonment of the AI theme. Several chip stocks showed signs of stabilizing on October 23, indicating that buyers had not disappeared entirely. The more important question is whether software can continue to outperform semiconductors or whether chip stocks will reclaim their earlier market leadership.
Defensive sectors outperform, but gains are uneven
Utilities rose 1.62% over the three-session period, while consumer staples gained 0.58%. Electricity, food and household products are generally considered defensive areas because demand tends to be relatively stable during an economic slowdown.
Their daily performance, however, was inconsistent. Consumer staples rose 3.31% on Thursday before falling 1.92% on Friday, while utilities also declined on Friday. At the same time, the U.S. 10-year Treasury yield remained elevated and approached 5%. Higher bond yields increase the opportunity cost of dividend-paying assets and can raise financing pressure on rate-sensitive groups such as utilities and real estate.
Outperforming a declining S&P 500 does not necessarily mean delivering a positive absolute return, and recent relative strength may not persist. If investors become too concentrated in recent winners, defensive sectors could also face repricing as positioning becomes crowded.
ETF inflows hit records, but demand is concentrated
ETF flows showed a similar split. Final data from ETFGI showed that U.S.-listed ETFs attracted $152.93 billion in September 2026, taking year-to-date inflows to a record $1.56 trillion. European ETFs attracted $51.04 billion during the month, lifting year-to-date inflows to a record $432.45 billion.
With three months still remaining in 2026 at that point, annual inflows into both U.S. and European ETFs had already exceeded their previous full-year records. Yet total assets in both markets edged lower in September. U.S. ETF assets fell from $16.36 trillion at the end of August to $16.24 trillion, while European ETF assets declined from $3.97 trillion to $3.94 trillion.
The figures show that new money flows and changes in portfolio market value are separate factors. Investors can continue adding capital to ETFs while falling prices of the underlying assets reduce total assets under management.
U.S. equity ETFs attracted $41.02 billion in September, compared with $40.08 billion for fixed-income ETFs. Commodity ETFs received $3.74 billion, while actively managed ETFs attracted $61.16 billion. Because actively managed ETFs may invest in both stocks and bonds, these figures should not be added together without accounting for overlap. In Europe, equity ETFs received $26.30 billion and fixed-income ETFs received $9.41 billion.
Total inflows in both the U.S. and Europe were below August levels. Flows alone cannot show whether investors were reducing risk or reallocating assets, but the near-parity between U.S. equity and bond ETF inflows suggests that some capital was participating in equities while also adding bonds and diversification.
Just 20 U.S. ETFs attracted a combined $81.34 billion, including $10.7 billion for SPY. In Europe, an inverse leveraged oil product designed to benefit from falling oil prices attracted $6.1 billion. That flow indicates that some ETF demand reflected tactical bearish positioning rather than traditional long-term ownership.
The September ETF data and the sector moves from October 21 through October 23 cover different periods and cannot by themselves confirm that the latest rotation has been validated by fund flows. Together, however, they show that strong overall ETF demand does not guarantee equal support for every sector, asset class or stock.
Lennar rebounds, with $85 a key level to watch
Lennar Corporation (NYSE: LEN) showed improving price action within the recently weak consumer discretionary sector. One of the largest U.S. homebuilders, Lennar had come under pressure after reporting results in September before beginning a rebound.
LEN rose 8.69% on October 22, breaking above the declining channel that had constrained the stock since August. It closed at $84.92 on October 23, holding the breakout area and bringing its two-session gain to about 9.3%.
From the October 21 through October 23 closes, LEN gained 9.29%, while the equal-weight consumer discretionary ETF (RSPD) fell 0.57%. Lennar therefore outperformed its sector by 9.86 percentage points. The stock had rebounded about 18.3% from its intraday low of $71.78 on October 14.
The move does not establish that Lennar has completed a long-term trend reversal, but it does show that its recent performance has been substantially stronger than that of its sector. Investors will be watching whether the stock can hold above the breakout area and whether housing conditions, financing costs and the company’s own cash flow can support the rebound.
Markets face a test of whether rotation broadens
Three possible developments will be important to watch. Energy could maintain its relative strength while communication services continues to lag, concentrating leadership in a smaller number of sectors. Alternatively, semiconductors could stabilize, technology could regain ground against SPY and communication services could also recover, suggesting that the recent adjustment was more about valuations and capital spending than a lasting change in leadership. A third possibility is that consumer discretionary and industrials continue to weaken while even the recent defensive winners retreat, shifting attention from which sectors are leading to whether overall market breadth is deteriorating.
The Federal Reserve meeting on October 27-28 and earnings reports from major technology companies during the same period will provide additional information on whether the latest moves represent short-term rotation or a more durable transfer of market leadership. For now, ETF money is still flowing in, but performance gaps across sectors, industries and individual stocks have widened. Both fund flows and relative price strength remain central measures of the market’s next move.