Communication Services Select Sector SPDR Fund (NYSEARCA:XLC) is down 8.78% year to date, and the two stocks most responsible for that slide are the ones you need to watch most closely over the next 12 months.
XLC tracks the communication services sector of the S&P 500, covering digital advertising, streaming, social media, and telecom. The problem is concentration: Meta Platforms (NASDAQ:META | META Price Prediction) holds a 19.2% weight, Alphabet (NASDAQ:GOOGL) Class A and Class C shares together account for roughly 19%, and the top five holdings represent over 50% of the portfolio. When those two names sell off, the fund sells off with them. Meta is down 20% year to date and Alphabet is down 12% year to date, dragging the ETF lower despite relative stability from T-Mobile US (NASDAQ:TMUS), which is up 4% year to date.
The Macro Signal That Will Define the Next 12 Months
The most important macro factor for XLC is the health of the digital advertising market, which is directly tied to consumer confidence. Meta and Alphabet together represent the bulk of the fund, and both generate the overwhelming majority of their revenue from advertising. When businesses pull back on ad budgets, these two feel it first.
The University of Michigan Consumer Sentiment Index currently sits at 56.6, near the threshold economists associate with recessionary consumer behavior. The index peaked at 61.7 in July 2025 before sliding to a low of 51.0 in November 2025. The recovery since then has not restored confidence to a level that suggests advertisers will aggressively expand budgets.
Ad spending follows consumer sentiment with roughly a one-to-three month lag. During the 2022 ad market contraction, the digital ad market contracted sharply and dragged communication services ETFs lower. The current environment is not as severe, but the VIX sits at 27.4, up 40% over the past month, signaling meaningful uncertainty.
Watch the University of Michigan Consumer Sentiment release, published monthly by the Federal Reserve Economic Data (FRED). A sustained reading below 55 would be a concrete warning sign for ad revenue growth at Meta and Alphabet heading into the second half of 2026.
The Fund-Specific Risk Hiding in Plain Sight
The micro factor most likely to affect XLC is the capital expenditure cycle at its two largest holdings and what it is doing to free cash flow.
Meta generated $43.59 billion in free cash flow in fiscal year 2025, a 19% decline year over year, despite revenue growing 22%. The culprit is capital spending: Meta’s capex reached $69.69 billion in 2025 and management has guided for $115 to $135 billion in 2026.
Alphabet spent $91.45 billion on capex in 2025 and has guided for $175 to $185 billion in 2026. Together, these two companies are committing roughly $300 billion to AI infrastructure in a single year.
That spending compresses the free cash flow that funds buybacks, dividends, and the valuation multiples investors assign to both stocks. Meta’s operating margin fell to 41% in Q4 2025, down from 48% a year earlier, even as revenue grew nearly 24%. Costs grew 40% year over year in that same quarter.
The next major checkpoint arrives soon. Alphabet reports Q1 2026 results on approximately April 27 and Meta follows on approximately April 28. Those reports will show whether the capex ramp is producing AI-driven revenue acceleration or simply widening the gap between spending and returns. Monitor the SSGA XLC fact sheet at ssga.com for monthly holdings updates that could reflect index rebalancing ahead of those reports.
What to Watch
If consumer sentiment stabilizes above 60 and the April earnings reports from Alphabet and Meta show AI revenue beginning to offset the capex surge, XLC’s concentration in those two names works in investors’ favor. If sentiment deteriorates further and free cash flow compression continues into Q2 2026, the fund’s 38% combined weight in two capital-intensive AI spenders will keep pressure on returns.
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