These 2 Sectors Have Driven 2021's Bull Market Rally

The stock market continued to gain ground on Friday, extending its gains so far in 2021. Although investors haven't quite seen the same performance as they did in 2020, they still have to be happy with the double-digit percentage gains that the Dow Jones Industrial Average (^DJI -0.11%) and S&P 500 (^GSPC 0.02%) have put up this year.

Data source: Yahoo! Finance.

Last year, investors loved high-growth stocks, which helped the Nasdaq Composite (^IXIC 0.10%) dramatically outperform the rest of the market. Lately, two very different sectors have taken the lead, and if it weren't for their big gains, the bull market in stocks might well not have lasted as long as it has.

Feel the energy

By far, the best performing sector so far in 2021 has been energy. The Energy Select Sector SPDR (XLE 0.07%) is up 47% year to date, and many individual energy stocks  have seen much larger gains.

The rebound for energy should come as no big surprise. Last year, energy stocks performed horribly as industrial activity came to a screeching halt at the beginning of the COVID-19 pandemic. Oil futures prices briefly went negative as market disruptions reached peak levels, and even some of the largest exploration and production companies found themselves stretched to the brink as they weighed strategies to pursue to generate much-needed cash while minimizing further impact under supply-glut conditions.

Image source: Getty Images.

Now, the global economy is gradually reopening, and energy products are much more in demand. As consumers finally start to travel again, gasoline prices have reached their highest levels in years, and crude prices are just below the $70 per barrel mark. That's been enough to make many players in oil and gas profitable again.

It bears mentioning that even with energy's rebound, many stocks are still down from where they were before the pandemic hit. That shows that longtime investors have still taken hits, but it also suggests further upside if favorable trends continue.

Financials are showing investors the money

Meanwhile, financial stocks have also managed to gain ground. After posting modest losses in 2020, the Financial Select Sector SPDR (XLF -0.02%) is up more than 30% so far in 2021.

For financials, the story has been a reversal of expectations for future monetary policy. During 2020, interest rates were at rock-bottom levels as central banks around the world did everything they could to support economic activity under pandemic conditions. Rates in many countries were negative, and even in the U.S., long-term interest rates at historically low levels created challenges for banks seeking to make money from lending.

This year, the potential for greater levels of economic activity has many economists looking for interest-rate increases. Already, rates have climbed significantly from their lows last year, and banks are looking to expand their interest margins once again as the yield curve steepens. The threat of inflation could force central banks to look at tighter monetary policy sooner rather than later, and financials are well positioned to see profits rise whenever that happens.

Keep your eyes on these winners

Energy and financials could build on their recent gains if the conditions that brought about their respective rebounds persist and gain momentum in the second half of 2021 and beyond. With nearly everyone expecting continued good times ahead, however, any signs of weakness in these two strong sectors could make investors think twice about how much further the current bull market has to run.