Market Review: The Leaders and Laggards of Q1 2023

The first quarter of 2023 closed on Friday. The S&P 500 returned 7.0% for the quarter, but that performance is deceptive, as I explain below. Despite the Q1 gain, the S&P 500 is still down 10.3% over the past 12 months.

This week we dive into the Q1 2023 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the year.

11 Sector Review

Select Sector SPDRs are targeted exchange-traded funds (ETFs) that divide the S&P 500 into 11 sector index funds. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, and Utilities. The 11 Select Sector SPDRs represent the S&P 500 as a whole.

WATCH THIS VIDEO: Stocks End Q1 on a High Note…Can it Last?

The first quarter was much worse than the S&P 500 performance would lead you to believe. Yes, the S&P 500 was up 7.0% for the quarter, but that is because the index has a high concentration of technology holdings. That sector — after a miserable 2022 — pulled out an excellent return in Q1.

Here was the sector breakdown for the first quarter.

It isn’t often that you see eight of 11 sectors underperforming the S&P 500, but that’s exactly what happened. Income sectors significantly underperformed, and the financial sector — driven by significant banking concerns — was the worst performer. The Dow Jones Industrial Average, by contrast, only returned 0.4% for the quarter, which is in the ballpark of the median sector performance in the graphic above.

The top performer for the quarter, Technology, led the S&P 500 into bear market territory last year and was one of 2022’s worst performers. But the sector bounced back in Q1 with an extraordinary 21.6% return. This sector includes technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment. Components of this ETF include Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), and Intel (NSDQ: INTC).

Close behind was Communication Services last year’s worst performer with a decline of 37.6%. After consecutive terrible years, I noted last quarter that I expected a bounce from this sector in 2023. It is off to a great start with a Q1 return of 21.1%. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media and services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).

Consumer Discretionary was the second-worst performer in 2022 (down 36.3%), and the only loser in Q4, declining 9.1%. But the sector showed strength in Q1, returning 16.1%. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing. It is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS).

Besides those three sectors, all other sectors underperformed the S&P 500. It was a steep drop to 4th place for the Materials sector with a gain of 4.3% in Q1. This sector includes companies that produce chemicals, construction materials, metals and mining, and paper and forest products. Among its largest components are DowDuPont (NYSE: DWDP) and Sherwin-Williams (NYSE: SHW).

The Industrial sector had an excellent Q4, but only returned 3.4% in Q1. Still, that was good for 5th place among all sectors (which was also the sector’s ranking for all of 2022). Industrial sector component industries include building products, construction and engineering, electrical equipment, conglomerates, machinery, and aerospace/defense. Important constituents of the Industrials sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

The Real Estate Index underperformed the S&P 500 in 2022 with a decline of 26.3%. That trend continued in Q1, with the sector’s 1.9% return lagging the S&P 500 by more than 5%. This index consists primarily of real estate management and development companies and real estate investment trusts (REITs). Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

Consumer Staples, another defensive sector, was the final sector in Q1 to eke out a positive return, gaining 0.7%. Making up this sector are companies involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).

The 3.3% Q1 decline in Utilities was primarily driven by inflation and rising bond rates. Companies that produce, generate, transmit or distribute electricity or natural gas predominantly make up the Utilities sector. Component companies include NextEra Energy (NYSE: NEE), Duke Energy (NYSE: DUK), and Dominion (NYSE: D).

I had previously warned that after substantially outperforming the market for two years, I expect the Energy sector to underperform in 2023. That was certainly the trend in Q1, when the sector declined by 4.3%. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Health Care sector gave up a chunk of its healthy Q4 gain, dropped 4.3% in Q1. The sector includes health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Bellwethers in the health care sector include Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE).

In last place for Q1 was the Financial sector. On the back of the collapse of several banks, and rising concerns about the health of the sector, the Financial sector declined by 5.5% in Q1. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.A, BRK.B), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C).

If you have a well-diversified portfolio, then you probably saw a performance that was roughly breakeven. If your portfolio is more in line with over S&P 500, then you had a great Q1, but you are still down year-over-year.

At the end of Q4, I wrote “This really feels like a bottom for some of the underperforming sectors like Technology and Communication Services.” That assessment was certainly spot on, as these were the top two performers for the sector. I think these sectors will continue to outperform, and that energy will continue to lag. As soon as the Federal Reserve’s hawkish stance on interest rates softens, we should see a broad rally.

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