Wall Street slices up the stock market into 11 sectors: technology, healthcare, energy, etc. This is how they have grouped stocks for decades.
But what if those categories are no longer applicable to the world we live in?
I created a different framework. It’s based on how companies (and assets) make and lose money as the government prints more debt, tries to keep interest rates low, and inflation chips away at real wages.
By the end of this piece, you’ll have a better understanding of how I categorize assets, and why thinking like this might be a better way to understand how the market works.
Learn more about the 3 different eras of investing (we’re currently in the 3rd era).
Productivity Premium: Who Actually Builds the Modern Economy
Productivity premium companies make the tools that help the rest of the economy run more efficiently. They provide the foundation that everyone else builds on.
There are two tiers here, and they depend on each other.
Tier 1A: Chips and Hardware (Physical Foundation)
These companies design and build the chips and equipment that power our economy. Without them, nothing else in this category works.
- Chip designers: NVIDIA, AMD, Qualcomm, Apple
- Fabrication: TSMC and Samsung
- Fabrication equipment: ASML, Applied Materials, Lam Research, and KLAC
- Memory (RAM): Samsung, SK Hynix, and Micron
Tier 1B: Cloud and Software Infrastructure
This tier sits on top of the chip layer. It turns raw computing power into tools businesses can actually use.
Without Tier 1A, Tier 1B has nothing to run on. Without Tier 1B, businesses can’t access what Tier 1A produces. They need each other to function.
- Cloud platforms: Microsoft (Azure), Amazon (AWS), Alphabet (Google Cloud).
- Networking infrastructure: Cisco, Arista (the companies that physically connect everything together)
- Enterprise software and databases: Oracle, IBM, Dell, Salesforce
Liquidity Monetization: Who Profits When Money Moves
Companies in this group don’t really create anything. Instead, they position themselves inside the flow of money. Every time money changes hands, grows, or is managed, they take a cut for themselves.
Pure Volume Risk: The Lowest Exposure
These companies have almost no downside beyond transaction volume (people buying and selling stuff) slowing down. Their revenue dips when people spend less, but nothing blows up on their balance sheet.
- Visa and Mastercard: They process transactions and collect fees. No lending or credit risk.
- CME Group and Cboe Global Markets: Collect fees from futures and options trading.
- Robinhood and Coinbase: Popular brokerages that collect fees from trading stocks and crypto.
Asset Price Risk: Moderate Exposure
These companies manage other people’s money and charge a percentage of it. When asset prices fall, their fees shrink. The losses belong to their clients, not them.
- BlackRock: Manages roughly $10 trillion in assets. As the money supply grows and assets inflate, BlackRock’s fees grow too.
- Morgan Stanley and Goldman Sachs: Trading, advisory, and asset management fees scale with market activity.
- Invesco and State Street: Revenue grows with more accounts and higher asset values.
Credit Risk: Highest Exposure
These companies share the same benefits as the companies above, but they actually hold the loans. When borrowers can’t pay, it’s a hit to their own balance sheet.
- JPMorgan, Bank of America, Wells Fargo, Citigroup: Traditional banks holding consumer and commercial loans. The 2008 financial crisis showed exactly what happens when defaults spike.
- Blackstone and private credit: Provide loans to companies that can’t access public debt markets. Little oversight and lack of liquidity can cause problems.
Government Spending: Why Some Companies Almost Can’t Fail
These companies get a significant chunk of their revenue directly from the federal government. In a world where government spending keeps growing, that’s about as reliable a revenue stream as you can find.
The category breaks into three main groups.
Defense and Military: Congress is the Consumer
Economic cycles barely touch this group. Defense budgets are politically protected. No politician wants to be the one to cut military spending.
You can also think of it like this: the US is the most powerful country on the planet. They will do anything (including spending more) to make it stay that way.
Some companies include:
- Lockheed Martin gets roughly 97% of its revenue from government contracts, mostly from the Department of Defense.
- RTX (formerly Raytheon) is similar at around 60%.
These companies don’t really have a market in the traditional sense. You and I aren’t going to Lockheed Martin to purchase weapon systems.
Medicare and Medicaid: The Biggest Category by Dollar Volume
- UnitedHealth gets roughly 75% of its revenue from administering government health programs through Medicare Advantage (a version of Medicare run by private insurers) and Medicaid.
- CVS has exposure through pharmacy benefits and insurance.
Pharmaceutical companies also rely on government reimbursement.
- Pfizer, Merck, AbbVie, Eli Lilly, Gilead, and others depend on Medicare Part D (the prescription drug program) and Medicaid for a significant share of what they actually collect.
- Medical device makers like Stryker, Abbott, and Intuitive Surgical flow through the same reimbursement system.
However there is a catch. Government pricing power cuts both ways. The government could also cap prices if needed.
For example, President Biden’s $35 insulin cap was great for people, not investors.
Government Technology: The Fastest Growing Sector
- Palantir gets over half its revenue from intelligence and military contracts.
- Microsoft, Amazon, Oracle, and IBM all compete for federal cloud infrastructure contracts worth hundreds of billions.
Once the government moves its systems to your platform, it almost never leaves.
The Real Economy: What Needs, Wants, and Hybrids Reveal
Real economy companies track how consumers are actually doing. They sit in the consumer discretionary and consumer staples sectors.
I split them into three categories: Needs, Wants, and Hybrids.
Needs: Spending That Doesn’t Stop
These companies sell what we need to survive.
- Walmart, Costco, and Procter and Gamble fall here because people need groceries and household staples whether the economy is weak or strong.
- Philip Morris represents an extreme version of this. Addiction makes tobacco a need for people. The same can be said for other companies that produce addictive substances.
Wants: The First Thing Consumers Cut
These companies do well when people have extra cash. When budgets tighten, these things are the first on the cutting block.
- Starbucks is a great example. A $7 latte is an easy cut when money gets tight. It’s cheaper to make coffee at home.
- Netflix, Walt Disney, Tesla, and Booking Holdings are other examples. These companies track consumer confidence closely. Their revenues tend to shrink when the consumer is hurting.
There’s something to note though. We live in a K-shaped economy. Wants companies might continue to do well because wealthy people keep spending even while average people cut back.
Hybrids: Part Needs, Part Wants
These companies serve both a need and a want, depending on how much money people have.
- Home Depot and Lowe’s are great examples. When the economy is strong, people remodel their kitchens. When money is tight, you still have to fix whatever breaks in your house.
Real and Scarce Assets: What Holds Value as Dollars Weaken
This category is about preservation. When the money supply keeps growing and the dollar keeps losing value, some assets do well because they’re tied to something you can’t print more of.
There are two types of scarcity that matter here.
Physical Scarcity: Resources You Can’t Print
These are finite resources that the economy structurally depends on.
- Exxon Mobile, Chevron, and ConocoPhillips aren’t selling a consumer preference. They’re pulling something out of the ground that the economy depends on.
- Newmont mines gold, a monetary metal (a store of value tied to no government) that’s held value for thousands of years.
- Southern Copper produces copper, which matters for electrification.
- Welltower (healthcare properties, senior living) and Prologis (logistics and industrial warehouses) own productive land.
You can always print more dollars. You can’t print more oil, gold, land and other natural resources.
Attention Scarcity: A Resource That Renews Daily
This one is a little different. Human attention is finite too. People are only awake for a certain amount of hours per day.
- Netflix, Walt Disney (Disney+), Meta (Facebook and Instagram), and Alphabet (YouTube and Google) have all built systems that capture huge amounts of human attention.
Attention scarcity resets every 24 hours. The infrastructure built to capture it compounds just like a physical asset does. However, it’s harder to convince people to break habits they’ve had for years.
Bitcoin: Scarcity With Uncertainty
Bitcoin deserves a mention as well. It was built with mathematical scarcity in mind. Only 21 million will ever exist.
The question is whether bitcoin will become a reliable store of value the way gold has. Bitcoin has its issues, but it belongs in the conversation.
How to Use This Framework When Thinking About Investing
Here’s a few things to keep in mind when thinking about this framework.
- Most companies fit cleanly in one category. Some span multiple.
- Amazon is a productivity premium through AWS, liquidity monetization through its ad and marketplace fees, and real economy through its retail operations. That overlap is why it’s so dominant.
- Sector labels and these categories often disagree.
- Nvidia and Apple are both technology companies. Nvidia is a productivity premium company, while Apple is also in the real economy. They respond to inflation and monetary policy in different ways.
- The real economy category is your read on Main Street.
- When needs companies start struggling, Americans are feeling the pain.
- Risk exposure matters as much as upside.
- All liquidity monetizers benefit from M2 expansion, but pure toll booths like Visa and credit-risk banks like JPMorgan carry very different downside scenarios. Understanding the difference changes how you think about what you own.
What These 5 Categories Tell You That Sectors Don’t
The sectors Wall Street uses to categorize stocks are still fine. But they don’t take into account the new monetary era that the United States is in.
We know that the US is in a ton of debt and the government will keep spending. The dollar’s value will erode and inflation will stay around.
Categorizing stocks based on how they respond to the fiscal and monetary situation can give you a better understanding of the fiscal situation, and provide you with better insights on how to think about investing in today’s world.