The S&P 500 index measures the performance of 500 of the largest publicly traded companies on stock exchanges in the U.S. These companies span 11 different market sectors, representing the various industries powering the U.S. economy. The S&P 500, a key benchmark for U.S. equities more broadly, has an overall market value of $37.28 trillion, according to FactSet.

In building out the Walnut Investment Core Portfolio, we strive for diversification across sectors and industries. We choose to invest in sectors which fit our 6-12 month world-view, and selecting stocks of profitable and industry-leading companies that are run by management teams with a history of returning cash to shareholders.

Here’s a breakdown of each sector by its weighting in the market, the industries that comprise them and the portfolio companies in each. (All of the S&P 500 and sector data was compiled from FactSet as of the market close on Sept. 12).

1. Information Technology

Sector market weight: 27.53%

Market cap: $10.26 trillion

YTD performance: up 39.8%

Industries: Communications equipment; electronic equipment, instruments & components; IT services; semiconductors & semiconductor equipment; software; technology hardware, storage & peripherals.

Portfolio Stocks:

• Microsoft (MSFT): The software company has become a key leader in artificial intelligence, boosted by its investment in research laboratory OpenAI, the creator of ChatGPT. The tech giant is also increasingly “leveraging AI offerings” at its Azure cloud computing unit, UBS said in July. The company’s focus on incorporating AI into its offerings is one of the key pillars of our investment thesis. Microsoft delivered strong fiscal fourth-quarter results last month, even if its revenue guidance was softer than expected. We still expect the stock to move even higher this year. The stock has gained roughly 40% year to date.

• Salesforce (CRM): The enterprise software giant is a global leader in customer-relationship-management technology. Over the past year, the company has changed its stripes following pressure from several activist investors, focusing more on expanding margins and managing share dilution — all while continuing to grow its top line at a steady clip. Salesforce has been able to navigate a difficult environment thanks to the leadership of reenergized co-founder and CEO Marc Benioff, with Deutsche Bank in May calling him “one of the rare leaders in software to take a company from inception to $30 billion+ in scale.” When Salesforce last reported quarterly results in August, it again proved it’s a transformed company balancing profitable growth at scale. The stock has risen more than 65% year to date.

• Nvidia (NVDA): The artificial intelligence chipmaker is the leader in high-performance computing and AI. Nvidia stock has climbed more than 200% year to date on the back of its AI prowess. As UBS put it recently, Nvidia is the “kingmaker” in AI. 

• Advanced Micro Devices (AMD): Although AMD is second place to NVDA, the total addressable market makes us comfortable to own both companies in this space. For much of 2022, AMD was plagued with the fact that they had to much inventory for the PC and low-end chip market. However, there's clear evidence that such market has bottomed. The focus for AMD is towards the end of this year, when they unveal their AI-chip competitor to NVDA. We look forward to estimates for this market being revised up, driving share value.

• Broadcom (AVGO): We initiated a position in this semiconductor giant in late August, noting that it should be one of the biggest beneficiaries of investments in AI. Two key factors for our investment are Broadcom’s AI network solution, Jericho3-AI, and its planned acquisition of enterprise software firm VMware (VMW), which has a big partnership with Nvidia. Broadcom is unique among semiconductor companies for its growing dividend payment and hefty share buybacks. The stock has gained more than 50% year to date.

• Oracle (ORCL): The enterprise cloud software firm is “in the early innings of its next chapter in accelerating revenue growth and expanding margins,” analysts at Mizuho said in August. We initiated a position in mid-August because Oracle has quietly become one of the top players in cloud infrastructure, joining the likes of Amazon Web Services, Google Cloud and Microsoft’s Azure. Oracle’s latest quarterly results were mixed, sending shares lower, even as it showed robust growth in cloud services. We see Oracle as one of the cheaper AI beneficiaries in the market and plan to continue to build out our position. The stock has still advanced roughly 35% year to date.

• Uber (UBER): We have a small position in Uber, with the thesis predicated on the turn-around story of the business, particularly on management's committment on free cash flow generation. For almost a decade, Uber had been losing money. This year marks the first time since the IPO of the company that the company generates free cash flow.

2. Health Care

Sector market weight: 13.24%

Market cap: $4.94 trillion

YTD performance: down 1.5%

Industries: Biotechnology; health-care equipment & supplies; health-care providers & services; health-care technology; life-sciences tools & services; pharmaceuticals.

Portfolio stocks in the Health Care sector:

• United Healthcare (UNH): The company is one of the best health insurers to own for its exposure to the government’s Medicare Advantage program. Last month, the company’s second-quarter results topped expectations, while management offered reassuring commentary on the worrisome medical-cost trends. UNH expects to grow earnings next year within its historical long-term target range of 11% to 15%. 

• Eli Lilly (LLY): The pharmaceuticals firm’s future earnings growth should be supported by “launches of its first in class/best in class compounds,” according to Cantor Fitzgerald. Those include the already-approved diabetes drug Mounjaro, which is expected to soon be approved as a weight-loss treatment in the U.S. Jim has long said Mounjaro could be the best-selling drug of all time. The promise of Mounjaro to combat adverse cardiovascular events and other conditions took the stock to an all-time high and added more than $60 billion of market value when Eli Lilly reported quarterly results last month. The stock has soared more than 60% year to date.

• Thermo Fisher (TMO): The life sciences company has a market-leading franchise in bioprocessing, which remains a core growth segment. At the same time, bioprocessing — the process of creating products through the use of a living thing like a cell or a virus — has been challenged by a post-pandemic hangover and TMO is no exception. We view this as a transitional year for the company as it works through excess inventory from the Covid pandemic, while also looking ahead to the separation of the firm’s environmental-and-applied-solutions division in the fourth quarter. TMO shares have done nothing in the past 2 years.

• GE Healthcare Technologies (GEHC): The medical technology giant, which was officially separated from General Electric(GE) at the start of the year, is well-positioned to see its top line grow as health-care providers continue to invest in critical equipment. We also believe the rollout of Alzheimer’s treatments will be a major demand tailwind. The company’s second-quarter earnings beat and guidance raise in late July were underappreciated by the market, creating buying opportunities. GEHC shares have gained 12% year to date.

3. Financials

Sector market weight: 12.71%

Market cap: $4.74 trillion

YTD performance: up 2.5%

Industries: Banks; capital markets; consumer finance; diversified financial services; insurance; mortgage REITs; thrifts & mortgage finance.

Portfolio stocks in the Financials sector:

• Morgan Stanley (MS): The bank’s services include investment banking, wealth management and investment management. Morgan Stanley’s acquisitions of E-trade and Eaton Vance helped expand its horizons beyond traditional investment banking, making it a wealth-and-investment management firm that benefits from recurring fees. The firm maintains solid fundamentals and an affordable valuation, along with a roughly 3.8% annual dividend yield. The stock has gained 2% year to date.

• Wells Fargo (WFC): This well-capitalized lender mainly focuses on retail and commercial banking, but has also grown its investment management business in recent years. Bank of America research analysts have a favorable outlook on Wells Fargo for its market-share gains in lending, while noting the firm is “turning around its wealth management business and growing investment banking revenues.” We have been impressed by Wells Fargo’s turnaround as management reduces expenses and improves compliance. The bank’s second-quarter results highlighted its strong underlying fundamentals and capital position. The stock has advanced about 2.5% year to date.

4. Consumer Discretionary

Sector market weight: 10.8%

Market cap: $4.03 trillion

YTD performance: up 35.8%

Industries: Auto components; automobiles; distributors; diversified consumer services; hotels, restaurants & leisure; household durables; internet & direct marketing retail; leisure products; multiline retail; specialty retail; textiles, apparel & luxury goods.

• Estee Lauder (EL): Our position in this prestige beauty company has been predicated on the economic recovery in China, which accounts for about a third of Estee Lauder’s total sales. But the company’s performance has been weighed down by a slower-than-expected recovery, particularly in Asia travel retail. We are sticking with the stock for now — on the belief that growth can begin to reaccelerate after the next few quarters, with a more material margin rebound in the back half of the year. The stock has dropped more than 35% year to date.

• Tesla (TSLA): This is probably the most controversial position in our portfolio. The company's valuation is very expensive, trading at almost 80x next year's earnings. However, the main reason for us to own Tesla is that the products in Tesla's pipeline has earnings potential not reflected in the estimates yet. Moreover, given the current battle with union workers and traditional automakers, we are reminded yet again of the margin effectiveness of Tesla in the business. 

 5. Communication Services

Sector market weight: 8.85%

Market cap: $3.3 trillion

YTD performance: up 44.5%

Industries: Diversified telecommunication services; entertainment; interactive media & services; media; wireless telecommunication services.

• Alphabet (GOOGL): The Google parent is a key player in the AI gold rush and “remains well positioned to be a key beneficiary of new AI-powered advertising tools,” according to JMP Securities. We expect shares to edge higher over time thanks to management finally getting cost growth below revenue growth, as demonstrated in the tech giant’s strong quarterly results in late July. The stock has gained more than 50% year to date.

• Meta Platforms (META): The stock of the Facebook and Instagram parent has soared nearly 150% year to date on the back of cost cuts and advancements in AI. Coupled with accelerating revenue growth, the stock is now more deserving of a so-called growth stock multiple instead of the “value” label investors had attached to the firm last year. With earnings estimates moving higher following strong quarterly results in July, we raised our price target to $350 a share, up from $250. 

6. Industrials

Sector market weight: 8.27%

Market cap: $3.08 trillion

YTD performance: up 8.1%

Industries: Aerospace & defense; air freight & logistics; airlines; building products; commercial services & supplies; construction & engineering; electrical equipment; industrial conglomerates; machinery; marine; professional services; road & rail; trading companies & distributors; transportation infrastructure.

• Deere (DE): This is our main play for the industrial sector. We want to participate on the upside in the case that the US economy avoids a recession and continues growth. Our investment thesis for Deere is predicated on the government spending for infrastructure projects. Year-to-date, DE is down 8%. 

• Boeing (BA): We want exposure to the recovery and growth of the travel business. Aircrafts are up for replacements, which will continue to give Boeing a strong order log. 2023 marks the first year Boeing returns to free cash flow growth since the pandemic. We continue to see strong order logs for 2024. YTD, BA is only up 2%.

7. Consumer Staples

Sector market weight: 6.55%

Market cap: $2.44 trillion

YTD performance: down 1.5%

Industries: Beverages; food & staples retailing; food products; household products; personal products; tobacco.

Club stocks in the Consumer Staples sector:

• Costco Wholesale (COST): The membership-only, wholesale retailer is a volume-based company that sells quality merchandise at lower prices. It’s an unmatched value proposition that has been able to withstand whatever twists and turns in the macroeconomic environment. This approach will continue to drive market-share gains and deliver dependable earnings streams for the foreseeable future. The possibilities of a membership fee increase and special dividend sometime in the future also keep us long-term owners of the stock, which has gained more than 20% year to date.

8. Energy

Sector market weight: 4.67%

Market cap: $1.74 trillion

YTD performance: up 8%

Industries: Energy equipment & services; oil, gas & consumable fuels.

• Chevron (CVX) and Pioneer Natural Resources (PXD): these are our cards for the energy play. Energy has been an underperformer this year compared to tech, however this is coming off a strong 2022 due to the elevated prices. We continue to view that there is a structural supply-demand imbalance in this sector, causing oil prices to stay elevated, giving these companies higher profits. Meanwhile, the companies are getting more and more disciplined in terms of capital expenditures and spending. Even more satisfying, the companies are returning record cash to shareholders in the form of dividends and stock buybacks.

9. Utilities

Sector market weight: 2.47%

Market cap: $922 billion

YTD performance: down 8.5%

Industries: Electric utilities; gas utilities; independent power and renewable electricity producers; multi-utilities; water utilities.

While we currently don’t own any utilities in the portfolio, investors typically own companies in the sector for their defensive characteristics and resilience in economic downturns. Utility stocks tend to perform better when there are concerns over slowing economic growth. Companies in this sector offer basic services such as electric power, natural gas, water supply or sewage removal. 

10. Materials

Sector market weight: 2.45%

Market cap: $915 billion

YTD performance: up 6.5%

Industries: Chemicals; construction materials; containers & packaging; metals & mining; paper & forest products.

• DuPont (DD): We initiated a position in this specialty chemicals maker in early August. The industrial company has become an interesting way to play the recovery in the semiconductor and electronics industries without paying a typically higher chip-stock multiple. Its electronics and industrial business makes differentiated materials and component solutions for high-performance computing, 5G, electronic vehicles, and consumer electronics like smartphones and PCs. The stock has advanced 8% year to date.

11. Real estate

Sector market weight: 2.44%

Market cap: $909 billion

YTD performance: up 0.9%

Industries: Equity real estate investment trusts; real estate management & development.

While we don’t own any real estate stocks, investors have historically invested in the sector for its reliable cash flow from income-generating properties. Beyond physical real-estate properties, investors can also purchase real estate investment trusts, or REITs, on the open market.