Communication Services Slips as Fed Rate Hike Weighs on Breadth

A thin advance and soft quality mix defined the Communication Services sector on Wednesday, September 16, with only 31.6% of its companies moving higher and smaller components trailing the largest weights. The exchange-traded fund tracking the sector, Communication Services Select Sector SPDR Fund (XLC), closed -0.9% at $112.99, retreating alongside the broader market after the Federal Reserve raised interest rates and signaled that additional increases could follow.

Weakness across the sector was widespread. The cap-weighted sector move was -0.6%, while the equal-weighted basket finished at -1.1%. When equal-weighted performance lags cap-weighted performance, smaller names are taking the brunt of the downturn while mega-cap holdings cushion the headline number. That broad softness matched the wider equity market, where 3 of the 11 sectors rose.

Individual holdings reflected that split. The session's sharpest decline came from Charter Communications Inc (-4.4%), while gains were limited to a handful of names led by EchoStar Corporation (+1.5%) and TKO Group Holdings, Inc. (+1.2%). The lack of broad participation left the group heavily skewed toward decliners.

Inside XLC, EasyAlpha grades 87.1% of the portfolio, where 24.5% of that graded exposure qualifies for quality grades of A or B. Companies graded A or B have stronger fundamentals and historically carry a lower risk of large drawdowns than companies graded D or E, leaving the fund with substantial concentration in middle and lower quality tiers.

The session adds to an uneven multi-month stretch for the group. Although XLC has moved +2.0% over the past month, it remains at -2.2% across the past one hundred sessions, -0.6% over six months, and -4.7% over the past twelve months.