Investment Research Update:
Third Quarter 2023

Cyclical Sectors May Outperform

Fidelity's director of quantitative market research Denise Chisholm offers data-driven views of the markets, equity sectors, and other investment building blocks, such as factors and thematic strategies.

Key takeaways

  • Investors weighed a shifting outlook during the second quarter, as inflation fell but stayed high, the U.S. Federal Reserve raised interest rates more slowly, and a bank crisis unfolded.
  • The information technology, communication services, and consumer discretionary sectors led the stock market during the quarter as investors turned their focus to cyclical stocks.
  • Utilities, energy, and consumer staples were the bottom performers for the quarter.

Several Cyclical Sectors Looked More Attractive

Within the S&P 500® index, the information technology, communication services, and consumer discretionary sectors led during the second quarter, as investors turned their focus to cyclical stocks. Fundamental, valuation, and relative strength signals appeared mixed overall at the end of June. That said, there may be a higher margin of safety in several cyclically oriented sectors, including consumer discretionary, mainly due to relative valuations.

Technology Stocks May Offer a Bullish Sign

U.S. technology stocks (within a Fidelity list of the top 3,000 stocks by market capitalization) gained 13% in April, easily reaching the top decile of one-month tech sector returns since 1962. Over this historical span, top-decile monthly tech sector returns have tended to coincide with strong forward 12-month returns for the overall market. Also in this time frame, cyclicals were more likely than defensive sectors to outperform the top 3,000 stocks.

High Valuations Spreads Have Signaled Strong Returns

At the end of May, valuation spreads—the gap in valuation between the cheapest and most expensive groups of stocks in the Russell 3000 Index based on quartiles of book yield—were in the top 5% of the market's historical range going back to late 1990. Stocks in this broad-based index historically posted strong average gains after valuation spreads reached this extreme.

Industrials Appeared Cheap

Industrials with the Fidelity list of the top 3,000 stocks by market capitalization looked inexpensive as of May, with valuations falling to their bottom historical quartile going back to early 1962, based on price-to-book ratio relative to the market. Historically, when the sector reached bottom-quartile relative price-to-book, it outperformed the market 71% of the time over the next 12 months.

EXHIBIT 1: Information technology led the market in Q2, while utilities lagged.

Performance as of 6/30/23SectorLatestQuarter1-Year3-YearAnnualizedDividendYieldWeight inS&P 500®S&P 500®Communication ServicesConsumer DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInformation TechnologyMaterialsReal EstateUtilities13.1%14.6%0.5%-0.9%5.3%3.0%6.5%17.2%3.3%1.4%-2.5%8.7%17.3%24.7%6.6%18.8%9.5%5.4%25.2%40.3%15.1%-4.4%-3.7%19.6%7.3%9.0%11.9%35.4%15.6%11.7%18.0%20.0%16.0%6.1%8.4%14.6%0.8%0.9%2.5%3.8%1.8%1.6%1.6%0.8%2.0%3.4%3.2%1.5%8.4%10.7%6.7%4.1%12.4%13.4%8.5%28.3%2.5%2.5%2.6%

Past performance is no guarantee of future results. Sectors defined by the Global Industry Classification Standard (GICS®); see Index Definitions for details. Performance metrics reflect S&P 500 sector indexes. Changes were made to the GICS framework on 9/24/18; historical S&P 500 communication services sector data prior to 9/24/18 reflect the legacy telecommunication services sector. The top three performing sectors over each period are shaded green; the bottom three are shaded red. It is not possible to invest directly in an index. All indexes are unmanaged. Percentages may not total 100% due to rounding.

Source: Haver Analytics, Morningstar, FactSet, Fidelity Investments, as of 6/30/23.

{{folder.name}}
  • Information provided in this document is for informational and educational purposes only. To the extent any investment information in this material is deemed to be a recommendation, it is not meant to be impartial investment advice or advice in a fiduciary capacity and is not intended to be used as a primary basis for you or your client's investment decisions. Fidelity and its representatives may have a conflict of interest in the products or services mentioned in this material because they have a financial interest in them, and receive compensation, directly or indirectly, in connection with the management, distribution, and/or servicing of these products or services, including Fidelity funds, certain third-party funds and products, and certain investment services.
  • Views expressed are as of 6/30/23, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates.
  • This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here. References to specific investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
  • Past performance is no guarantee of future results.
  • Investing involves risk, including risk of loss.
  • All indexes are unmanaged. You cannot invest directly in an index. Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, and other expenses, which would reduce performance.
  • Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
  • Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.
  • The energy industries can be significantly affected by fluctuations in energy prices and supply and demand of energy fuels, energy conservation, the success of exploration projects, and tax and other government regulations.
  • The technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits.
  • The financials industries are subject to extensive government regulation, can be subject to relatively rapid change due to increasingly blurred distinctions between service segments, and can be significantly affected by availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.
  • The consumer discretionary industries can be significantly affected by the performance of the overall economy, interest rates, competition, consumer confidence and spending, and changes in demographics and consumer tastes. confidence and spending, and changes in demographics and consumer tastes.
  • Index Definitions
  • The Russell 3000® Index is a market capitalization-weighted index designed to measure the performance of the 3,000 largest companies in the U.S. equity market. The S&P 500® index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Sectors and industries are defined by the Global Industry Classification Standard (GICS). The S&P 500 sector indexes include the standard GICS sectors that make up the S&P 500 index. The market capitalization of all S&P 500 sector indexes together comprises the market capitalization of the parent S&P 500 index; each member of the S&P 500 index is assigned to one (and only one) sector.
  • Sectors are defined as follows:
  • Communication Services: companies that facilitate communication or provide access to entertainment content and other information through various types of media.
  • Consumer Discretionary: companies that provide goods and services that people want but don't necessarily need, such as televisions, cars, and sporting goods; these businesses tend to be the most sensitive to economic cycles.
  • Consumer Staples: companies that provide goods and services that people use on a daily basis, like food, household products, and personal-care products; these businesses tend to be less sensitive to economic cycles.
  • Energy: companies whose businesses are dominated by either of the following activities: the construction or provision of oil rigs, drilling equipment, or other energy-related services and equipment, including seismic data collection; or the exploration, production, marketing, refining, and/or transportation of oil and gas products, coal, and consumable fuels.
  • Financials: companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, and insurance and investments.
  • Health Care: companies in two main industry groups: health care equipment suppliers and manufacturers, and providers of health care services; and companies involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products.
  • Industrials: companies whose businesses manufacture and distribute capital goods, provide commercial services and supplies, or provide transportation services.
  • Materials: companies that are engaged in a wide range of commodity-related manufacturing.
  • Real Estate: companies in two main industry groups—real estate investment trusts (REITs), and real estate management and development companies.
  • Technology: companies in technology software and services and technology hardware and equipment.
  • Utilities: companies considered to be electric, gas, or water utilities, or companies that operate as independent producers and/or distributors of power.
  • Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.
  • This material may be distributed through the following businesses: Fidelity Investments® provides investment products through Fidelity Distributors Company LLC; clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC (Members NYSE, SIPC); and institutional advisory services through Fidelity Institutional Wealth Adviser LLC.
  • Personal and workplace investment products are provided by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
  • Institutional asset management is provided by FIAM LLC and Fidelity Institutional Asset Management Trust Company
  • © 2023 FMR LLC. All rights reserved.
 
 

There was an issue with your input
 
OK
 
 

Please confirm
 
OK
   
Cancel