3 Stock Market Sectors Poised for Momentum in Q3

Key Points

• The XLU ETF, up 9.5% YTD, is attempting to make a higher low near its rising 50-day SMA within a higher timeframe uptrend.
• The XLI industrial ETF is consolidating near 52-week highs in a lengthy consolidation, hinting at a potential breakout higher.
• Following weeks of consolidation, XLF could be poised for a bullish move and potential outperformance in Q3.

As headlines continue to be dominated by technology and semiconductor stocks, with AI advancements propelling companies like NVIDIA NASDAQ: NVDA to new heights, investors might find promising opportunities in more traditional, defensive sectors. 

The Financial Select Sector SPDR ETF NYSE: XLF, Utilities Select Sector SPDR Fund NYSE: XLU, and Industrial Select Sector SPDR Fund NYSE: XLI are setting up for potential momentum higher as the third quarter approaches. While these sectors may not be as exciting as the tech giants, they offer solid diversification and promising setups for traditional investors.

So, let’s take a closer look at these three sectors, which are building bases ahead of potential significant directional moves in the third quarter. 

Utilities ETF XLU: Analyst Ratings and Price Target Insights

The XLU seeks to mirror the performance of the Utilities Select Sector of the S&P 500 Index. This sector includes companies from industries such as electric utilities, multi-utilities, independent power producers, energy traders, and gas utilities. 

YTD, the XLU has seen a solid performance, up 9.5%. After a month-long pullback, falling nearly 5% from its 52-week high, the ETF has pulled back into a potential support zone near its rising 50-day SMA. It is now attempting to make a higher low, signaling a potential breakout higher, continuing its higher timeframe uptrend.

The sector ETF's holdings have an aggregate rating of Moderate Buy based on 310 analyst ratings covering 31 companies, representing 99.7% of the portfolio. The aggregate price target for XLU holdings is $73.21, ranging from $61.89 to $84.48, and forecasts a modest upside of 5.5%.

Industrial Sector Insights: XLI's Moderate Buy Ratings and Price Targets

The XLI aims to reflect the performance of publicly traded equity securities in the  Industrial Select Sector Index. This index includes companies in the aerospace and defense industry, industrial conglomerates, machinery, road and rail, air freight and logistics, commercial services and supplies, and professional services. 

Despite lagging the benchmark and overall market’s YTD gains of almost 15%, with YTD gains of nearly 8%, the XLI is consolidating above all key SMAs and remains in a higher timeframe uptrend. This lengthy consolidation near its 52-week highs suggests a breakout higher could lead to a significant upward movement.

The ETF has a 1.31% dividend yield and a net expense ratio of 0.09%. Holdings in XLI have an aggregate rating of Moderate Buy based on 731 analyst ratings covering 50 companies, constituting 88.4% of the portfolio. The aggregate price target for XLI holdings is $130.96, ranging from $101.12 to $155.33, and it predicts an almost 7% upside. Its two top holdings include General Electric NYSE: GE and Caterpillar NYSE: CAT.

XLF Holdings: Moderate Buy Ratings and 5% Upside Forecast

After displaying relative strength in the first quarter, the financial sector, represented by the XLF, underperformed in the second quarter, with the ETF down 1.4% for the period. Several weeks ago, a double top pattern seemed all but confirmed for the XLF. However, after weeks of consolidating, the XLF might be gearing up for a bullish move and potential outperformance in Q3. The ETF has reclaimed critical simple moving averages (SMAs), such as the 50-day and 20-day. In the penultimate week of the quarter, the XLF outperformed the leading semiconductor sector, closing up 1.3%.

XLF holdings have an aggregate rating of Moderate Buy based on 809 analyst ratings covering 50 companies, making up 94.7% of the portfolio. The aggregate price target for XLF holdings is $43.26, ranging from $35.62 to $49.55, which forecasts an almost 5% upside for the ETF.

Promising Setups: Financial, Utilities, and Industrial Sectors for Q3

As the third quarter approaches, the financial, utilities, and industrial sectors appear poised for potential upward momentum. While tech and semiconductor stocks continue to capture headlines, these more traditional sectors offer promising setups for investors seeking diversification and stability. 

The XLF, XLU, and XLI ETFs each present unique opportunities for growth and income, backed by solid fundamentals and favorable technical setups. Investors might want to consider these sectors as part of a balanced portfolio strategy, keeping an eye on their performance and critical support levels as the quarter progresses.