What it is
Sector rotation is an investment strategy where investors shift their capital from one industry sector to another, anticipating which sectors will outperform based on their position in the economic cycle. For example, during an economic expansion, investors might favor cyclical sectors like technology or consumer discretionary. Conversely, during a downturn or recession, defensive sectors such as healthcare, utilities, or consumer staples might be preferred for their stability and consistent demand.
This strategy is often driven by macro-economic indicators, interest rate expectations, and corporate earnings reports. Analysts and investors monitor economic data, central bank policies, and company guidance to predict which sectors are poised for growth or contraction. Observing sector rotation helps retail investors understand broad market trends and institutional sentiment, as large fund managers frequently employ this strategy, influencing the performance of entire industry groups.
Why it matters
Understanding sector rotation helps you anticipate which industries might perform well or poorly, guiding your investment decisions to align with economic trends.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice