Over 20 years ago, I built a scoring system that ranks stocks, industries, and sectors using fundamental and technical data, and sold that model to the largest hedge funds and mutual funds in America through the institutional research firm I founded, E.B. Capital Markets.

The system has a knack for spotting trends early and keeping me on the right side of a trade for as long as possible. For instance, last summer, the large-cap ranking, which is still available at Limelight Alpha, spotlighted healthcare’s move. It also highlighted energy before the U.S. shook up the global oil markets with its decision to oust Maduro in Venezuela.

Limelight Alpha

Those sectors remain near the top of the ranking, and for good reason. The Energy Select Sector SPDR ETF (XLE) and the Health Care Select Sector SPDR ETF (XLV) are up 6.4% and 12.3% since September 2025, outpacing the S&P 500‘s 4.18% gain. Individual stocks within those sectors have done much better. For example, healthcare Giant Johnson & Johnson (JNJ) is up 17% while energy services giant Halliburton (HAL) has gained 32%.

Those sectors are doing a lot of heavy lifting lately, helping investors offset some of the challenges that have emerged in technology stocks, which have slid to neutral in the ranking. Over the same period, the Technology Select Sector SPDR ETF (XLK) has returned 4.41%, while AI powerhouse Nvidia is up only 1.1%.

How long this trend in outperformance lasts is anyone’s guess. Still, the rally in healthcare and energy, while welcome to investors eager to put money in something other than the Mag 7, may also be flashing a troubling warning about where we are in the economic cycle.

Energy and healthcare stocks are late-cycle stars

The U.S. economy looks good and strong on the surface. Gross Domestic Product (GDP) was up 4.3% in the third quarter, and the Atlanta Fed’s GDPNow tool pegs fourth quarter GDP at 5.3%. Goldman Sachs estimates that GDP will grow 2.6% in 2026.

However, if you dig a little deeper into the economy, there are some cracks in the foundation that warrant watching.

The unemployment rate has edged up to 4.4% from 4% in January of 2025, according to the Bureau of Labor Statistics, or BLS, as layoffs surged to 1.2 million last year, according to Challenger, Gray & Christmas, up 58% from 2024.

That’s among the worst years for layoffs since 2000:

  • 2020: 2,304,755
  • 2001: 1,956,876
  • 2002: 1,466,823
  • 2009: 1,288,030
  • 2003: 1,236,426
  • 2008: 1,223,993
  • 2025: 1,206,374
    Source: Challenger, Gray & Christmas.

It doesn’t help matters that everyday prices remain high. For instance, the Consumer Price Index pegged December inflation at 2.7%, up from 2.3% last April, due mainly to upward pressures associated with the effective tariff climbing to 16.8% from 2.4%, according to Yale Budget Lab.

The reality is that strong GDP growth is masking a potential risk that the economy, which has become bifurcated, with high-income earners doing significantly better than lower-income households, is becoming a bit long in the tooth.

The energy and healthcare stocks rally is also a historical warning flag that may suggest the economy (and stock prices) are due for a reset.

According to Fidelity‘s research, healthcare and energy have historically outperformed in the late stages of the economic cycle and underperformed during the early stages of the cycle.

Fidelity.

The dynamic isn’t lost on veteran technical analysts, including Helene Meisler, who has tracked the stock market since the early 1980s, including a stint at Goldman Sachs, and Walter Deemer, a legendary technical analyst whose career stretches all the way back to the 1960s, before Nifty 50 became the rage in the early 1970s and inflation rocked markets in the late 1970s and early 1980s.

In a post on X, Meisler and Deemer had a short yet poignant exchange.

“Hey Walter Deemer, is it true that energy is the last to rally? Have heard you say that before,” asked Meisler of her long-time friend.

“Traditionally, that’s the case…” replied Deemer.

Deemer, a little before that exchange, had posted a screenshot quote from his book, “When The Time Comes To Buy, You Won’t Want To.”

The quote is a fantastic reminder to all of us that stocks may go up and to the right over time, but they don’t do so in a straight line. Along the way, there are plenty of pops and drops that can emotionally (and incorrectly) shake you from your financial plan.

What does it all mean for investors?

I’ve been at this a long time, but not as long as Meisler or Deemer, so their concern should raise some alarm bells for you.

Previously, I pointed out that every Wall Street analyst is on the same side of the proverbial boat. Their unanimously bullish S&P 500 outlooks are a historically risky canary in the coal mine, given markets have a funny way of disappointing the masses.

That said, one of the first things I learned from my mentor thirty years ago is that stocks tend to go up (and down) more than people imagine. Betting against the tape is a risky proposition, despite the allure of selling high and buying low. The reality is that active trading requires you to be right twice (when you sell and when you rebuy), and that’s not as easy as it sounds, particularly given humans’ penchant toward greed and fear.

For me, I’m taking this signal as a good time to ‘stress test’ my portfolio. I’m looking at positions that have grown much larger than my normal average weighting and considering if it’s time to lock in some (not all) of those gains. I’m also looking to see if any straggler stocks are lurking around. Invariably, I find a stock or two I’ve bought for a reason that no longer applies, but I haven’t sold because of complacency or market strength.

Some simple pruning can free up some cash that I’ll be able to use if stocks do trade lower at some point this year. In the meantime, I can still earn a solid 3.5% in short-term Treasuries or a money market.

Related: Top energy stocks to buy amid Venezuela chaos