When you buy a stock, you’re not just betting on that company—you’re also betting on its industry and sector. Research shows these group-level factors account for roughly half of your stock’s price movement, whether you realize it or not.
This isn’t opinion. It’s backed by decades of market research.
The Core Finding: The 50% Rule
William O’Neil, founder of Investor’s Business Daily (IBD), conducted multi-decade research analyzing the best-performing stocks across 130 years of market history. His findings established a clear hierarchy of what drives stock prices:
| Factor | Contribution to Price Movement |
|---|---|
| Industry Group Performance | ~37% |
| Sector Performance | ~12% |
| Combined Group Effect | ~49% |
| General Market Direction | ~50% |
The remaining factors—company-specific fundamentals, management decisions, and competitive positioning—contribute approximately 30-40% of price movement. The rest is noise and sentiment.
The critical insight: Nearly half of your stock’s performance is determined before you even evaluate the company itself.
Why Industry Matters 3x More Than Sector
One of the most actionable findings from this research: industry groups have 3x the explanatory power of broader sectors (37% vs 12%).
This makes intuitive sense. Consider technology:
- The sector (Information Technology) is broad
- But within it, semiconductors might rally while enterprise software stagnates
- Or AI infrastructure stocks surge while legacy hardware declines
Sector-level analysis masks this critical dispersion. A stock in the top-performing industry within a mediocre sector will often outperform a stock in the worst-performing industry within a strong sector.
The Academic Foundation
O’Neil’s findings aren’t isolated. Multiple independent research streams confirm the industry-level importance:
Performance Attribution Models
The Brinson-Fachler performance attribution framework—an institutional standard for decomposing portfolio returns—demonstrates that sector and industry allocation decisions consistently explain 40-60% of portfolio excess returns relative to benchmarks.
In plain terms: where you allocate capital (which industries you overweight or underweight) matters as much as which specific stocks you pick.
Cross-Sectional Factor Research
Academic analysis reveals that industry momentum strategies generate superior risk-adjusted returns compared to individual stock momentum. This happens because industry groups exhibit more persistent trends due to shared fundamental drivers:
- Regulatory changes affecting all companies in an industry
- Input cost fluctuations (oil prices, semiconductor supply)
- Technological disruption hitting an entire sector
- Macro factors like interest rates affecting rate-sensitive industries uniformly
When these forces move, they move entire groups—not just individual stocks.
What This Means for Your Investing
The Controllable Factor
Here’s why this research matters for individual investors:
- Market-wide factors (interest rates, GDP, geopolitics) affect all stocks—you can’t control this
- Company-specific analysis requires deep fundamental work and still carries high uncertainty
- Industry/sector selection is the largest controllable factor with systematic, identifiable patterns
Industry group strength provides a high-probability tailwind that can be identified through relative strength analysis before you ever look at an individual stock.
The Practical Implication
Screen industries first, stocks second.
A great stock in a weak industry faces headwinds. An average stock in a strong industry often outperforms. The research suggests a two-stage approach:
- First filter: Identify industries showing relative strength (top quartile vs. the broader market)
- Second filter: Apply your individual stock criteria within those winning industries
This captures the ~49% group effect while allowing you to select the strongest setups within winning industries.
Understanding the Classification System
To apply this framework, you need to understand how industries are classified.
GICS: The Institutional Standard
The Global Industry Classification Standard (GICS), developed by MSCI and S&P Dow Jones Indices, organizes the market into:
- 11 Sectors (broadest level)
- 25 Industry Groups
- 74 Industries
- 163 Sub-Industries (most granular)
The 25 GICS Industry Groups
These are the industry groups that matter most for the research findings above. This is your reference list:
| Sector | Industry Groups |
|---|---|
| Energy | Energy Equipment & Services, Oil Gas & Consumable Fuels |
| Materials | Chemicals, Construction Materials, Containers & Packaging, Metals & Mining, Paper & Forest Products |
| Industrials | Aerospace & Defense, Building Products, Construction & Engineering, Electrical Equipment, Industrial Conglomerates, Machinery, Commercial & Professional Services, Transportation |
| Consumer Discretionary | Automobiles & Components, Consumer Durables & Apparel, Consumer Services, Retailing |
| Consumer Staples | Consumer Staples Distribution & Retail, Food Beverage & Tobacco, Household & Personal Products |
| Health Care | Health Care Equipment & Services, Pharmaceuticals Biotechnology & Life Sciences |
| Financials | Banks, Financial Services, Insurance |
| Information Technology | Software & Services, Technology Hardware & Equipment, Semiconductors & Semiconductor Equipment |
| Communication Services | Telecommunication Services, Media & Entertainment |
| Utilities | Utilities (Electric, Gas, Multi, Water, Independent Power) |
| Real Estate | Equity REITs, Real Estate Management & Development |
High-Impact Industry Groups for Active Traders
For more granular analysis, Investor’s Business Daily tracks 197 industry groups. Here are the most liquid and institutionally-followed groups—the ones that tend to lead market moves:
Technology & Growth:
- Semiconductors & Semiconductor Equipment
- Application Software
- Systems Software
- Data Processing & Outsourced Services
- Electronic Components
- Communications Equipment
Healthcare:
- Biotechnology
- Specialty Pharmaceuticals
- Healthcare Technology
- Medical Devices
Industrials & Defense:
- Aerospace & Defense
- Building Products
- Electrical Equipment
Financials:
- Investment Banking & Brokerage
- Asset Management & Custody Banks
- Regional Banks
Energy & Resources:
- Oil & Gas Exploration & Production
- Renewable Energy Equipment
Consumer:
- Internet & Direct Marketing Retail
- Restaurants
- Homebuilders
This level of detail helps identify which specific pockets of an industry are leading—critical when the research shows industry selection is 3x more important than broad sector allocation.
The Bottom Line
When evaluating any stock, remember:
- ~50% of its movement is determined by industry and sector factors
- Industry selection is 3x more important than broad sector allocation
- Screening industries first gives you a systematic edge before individual stock analysis
- Strong industries provide tailwinds; weak industries create headwinds regardless of company quality
This doesn’t mean individual company analysis doesn’t matter—it does. But it means the smartest investors consider the group context first.
The AI-Insights section of this blog applies this framework: we analyze sectors and industries to understand the macro context before evaluating individual opportunities.
This analysis synthesizes research from William O’Neil’s IBD methodology, the Brinson-Fachler attribution model, and academic factor research. For the original sources, see O’Neil’s “How to Make Money in Stocks” and IBD’s methodology documentation.