Sectors: How the Stock Market Is Organized — Stock Market Fundamentals

§ 01

GICS organizes the universe at four levels of granularity: Sector → Industry Group → Industry → Sub-Industry. Apple's path is Information Technology (Sector) → Technology Hardware & Equipment (Industry Group) → Technology Hardware, Storage & Peripherals (Industry) → Technology Hardware, Storage & Peripherals (Sub-Industry). The deeper levels matter for peer comparison — comparing AAPL to another computer-hardware maker is more meaningful than comparing AAPL to a software firm even though both are 'tech'.

§ 02

Compare within sector first, across sector second. A 22x P/E is roughly mid-range for software (typical 25-35x) but at the top of the typical utility range (16-22x). Looking at P/E without sector context is the most common beginner valuation error. Software trades at higher multiples because of higher growth expectations and operating leverage. Utilities trade at lower multiples because growth is regulated and predictable. Neither is 'expensive' or 'cheap' in absolute terms — only relative to their own sector and to their own historical range.

§ 03

Look up three companies in different sectors: AAPL (Information Technology), JPM (Financials), and KO (Consumer Staples). Find each company's P/E ratio on its ticker page. Observe how the spread reflects sector dynamics — growth expectations for tech, regulated returns for financials, stable cash flows for staples — rather than business quality. The P/E concept itself is covered in val-1, which comes later in the valuation path.

§ 04

Amazon (AMZN) operates in multiple sector spaces: retail (Consumer Discretionary), AWS cloud (Information Technology), and Prime Video (Communication Services). GICS assigns AMZN to Consumer Discretionary based on revenue dominance (retail is roughly 85% of Amazon's revenue). When you buy a sector ETF like XLY (Consumer Discretionary) or XLK (Technology), the underlying constituent rules follow GICS — so AMZN is in XLY and NOT in XLK, even though AWS is a meaningful tech business inside it. A multi-sector company like Amazon won't appear in the sector ETF you might expect. For sector-by-sector portfolio construction, see port-1 'Diversification' and risk-3 'Portfolio Risk Decomposition'.

Five questions · AI feedback

Sit with the ideas.

Ashbrook Capital is comparing two stocks for a client. Sterling Generation is a US electric utility trading at a P/E of 22x. Halcyon Software is an enterprise-SaaS company trading at a P/E of 28x. The client says: 'Halcyon's P/E is higher, so it's the more expensive stock.' Is the client right?

Why:

Sit with the ideas.

Other lessons in this course.