State Street: Pair tech with utilities, energy with industrials

State Street Investment Management is advising investors to pair technology with utilities, or energy with industrials, to reduce portfolio volatility and position for continued AI spending and higher rates. The guidance was offered during a VettaFi webcast on Wednesday hosted by Todd Rosenbluth and featuring Matthew Bartolini, Anqi Dong and Kevin Abbott of State Street.

The strategists pointed to a mixed macro picture. U.S. corporate earnings rose about 22% year over year in the most recent quarter, the firm reported. At the same time, “super core CPI,” which excludes housing and energy, has climbed above 3%, indicating inflation beyond energy. Minutes from the Federal Open Market Committee showed members debating potential rate increases, and long-term U.S. Treasury yields have reached levels not seen since 2007. Markets had earlier priced in roughly 60 basis points of year-end rate cuts that have since been erased.

The panel highlighted concentrated market leadership. Technology accounted for more than half of market gains since the March lows, with communication services the only other sector to outperform over that period. On valuation measures, State Street identified energy as the most attractively priced sector on both an absolute and relative basis. Industrials and technology sit in the top quintile of their 15-year valuation ranges.

Kevin Abbott proposed building sector exposure in pairs instead of making isolated bets. He recommended a 50/50 split of technology and utilities, saying that since the late-2022 surge in AI investment following the launch of ChatGPT, a blended tech-utilities portfolio delivered lower volatility than tech alone and posted annualized returns ahead of the S&P 500. Abbott pointed to rising electricity demand from data centers as a driver of utilities’ earnings, and noted that utilities are on pace for double-digit earnings growth in 2026.

The second suggested pairing combines energy with industrials. Abbott described both sectors as holders of hard assets and revenue streams that are less likely to be disrupted by AI, and as ways to capture geopolitical and defense spending. The panel cited global military spending of $2.6 trillion last year. Abbott also noted projected capital expenditures from four major AI “hyperscalers” — Amazon, Alphabet, Meta and Oracle — of about $690 billion this year and more than $800 billion in 2026, with industrial and utility firms positioned to benefit from that spending.

Anqi Dong described the current investment backdrop as a “fragile balance,” with solid fundamentals but concentrated leadership that raises rotation risk. Bartolini urged selective sector exposure and pointed to the interaction of strong earnings and persistent inflation as a reason for deliberate sector positioning.

State Street noted that its sector ETFs provide direct market access to the sectors discussed, including XLI for industrials, XLE for energy, XLU for utilities and XLK for technology. A closing webcast poll showed investor interest led by energy at 39%, technology at 31%, and industrials, utilities, healthcare and materials each receiving interest from more than 20% of respondents. The strategists emphasized pairing sectors as a tool to manage volatility while maintaining exposure to both AI-related investment and traditional revenue sources.