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Posted September 29, 2025 at 9:09 am
1/ Rotation Into Value and Typical Gap Range
2/ Catalysts for Energy (XLE) to Outperform Technology (XLK) in the Short Term
3/ Watch Small Caps and Mid Caps in the Energy Sector
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Rotation Into Value and Typical Gap Range
XLK has consistently outpaced XLE, but the gap widens during tech rallies and narrows during energy booms. XLE tends to catch up when investors rotate into value or if oil prices surge and has actually proven to be an effective hedge due to its slightly negative correlation to technology stocks. While not perfectly mean-reverting, the spread between XLK and XLE does oscillate offering tactical opportunities. Recent market activity in September 2025 suggests a notable rotation out of growth-oriented mega-cap tech $XLK and into value and dividend-rich sectors specifically $XLE. Note the discrepancy of the outperformance of XLK vs XLE is a wide 110% which also coincided and happened during the 2020-2021 boom only to provide outperformance next year for XLE to materially gain 60% while XLK shed 30%.
Typical Gap Range
Catalysts for Energy (XLE) to Outperform Technology (XLK) in the Short Term
Key factors that could tilt the balance in favor of energy are a spike in crude oil prices, hawkish Fed policies , geopolitical risks or simply investors rotating to energy companies due to their strong cash flow generation and relative valuation. Seasonally, demand also rises in the last quarter of the year due to winter months necessitating higher demand for heating fuels.
Watch Small Caps and Mid Caps in the Energy Sector
Although we don’t see a broad-based rally in $XLE holdings against $XLK just yet, we note that the last 2 weeks has shown brisk outperformance specifically in smaller caps and mid caps in the energy space which may precede the outperformance of the sector. $HAL $APA and $EXE are starting to lead the sector.
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Originally posted 26th September 2025
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