Investment Research Update:
Second 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 first 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.
  • Financials, energy, and health care were the bottom performers for the quarter.

Potentially Bullish Setup for Tech

Bottom-quarter fundamentals offered a possible contrarian buy signal for information technology. Consumer discretionary also looked increasingly constructive based on contrarian indicators. Recovering fundamentals boosted the outlook for financials stocks. Conversely, high valuations could present headwinds for consumer staples and real estate.

Financials Sell-Off May Spell Good News for the Market

Financials stocks dropped 4% on March 9, coinciding with the Silicon Valley Bank failure. Financials sell-offs of this magnitude are rare, happening just 1% of the time since 1989. When they've occurred, the S&P 500 index has advanced, on average, over the next 12 months, whereas financials have trailed the market.

High Valuations for Defensive Stocks May Signal Cyclical Advance

As of the end of February, defensive stocks traded at a large premium to cyclicals. This may be another bullish signal. Since 1976, when the valuation difference between defensive and cyclical sectors was in its top quartile, based on price to forward earnings, the S&P 500 advanced over the next 12 months 90% of the time, and cyclicals typically outperformed.

Technology Stocks May Benefit from Plummeting Earnings

Technology earnings have fallen. Surprisingly, technology stocks have outperformed, on average, for the 12 months after year-over-year earnings growth was in its bottom quartile. This may be because the earnings outlook for tech tended to improve after those weak patches.

EXHIBIT 1: Information technology led the market in Q1, while financials and energy lagged

Performance as of 3/31/23SectorLatest Quarter1-Year3-Year AnnualizedDividend YieldWeight in S&P 500®S&P 500®Communication ServicesConsumer DiscretionaryConsumer StaplesEnergyFinancialsHealth CareIndustrialsInformation TechnologyMaterialsReal EstateUtilities20.5%16.1%0.8%-4.7%-5.6%-4.3%3.5%21.8%4.3%2.1%-3.2%7.5%-17.8%-19.6%1.2%13.6%-14.2%-3.7%0.2%-4.6%-6.3%-19.6%-6.2%-7.7%9.4%14.5%14.7%48.4%18.1%15.4%21.7%24.3%23.9%10.1%10.3%18.6%0.9%0.9%2.5%3.7%1.9%1.7%1.6%0.9%2.0%3.4%3.1%1.6%8.1%10.1%7.2%4.6%12.9%14.2%8.7%26.1%2.6%2.6%2.9%

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 3/31/23.

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  • Views expressed are as of 3/31/23, 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 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. The S&P CoreLogic Case-Shiller U.S. National Home Price Index is a composite of single-family home price indexes for the nine U.S. Census divisions and is calculated monthly. It is included in the S&P CoreLogic Case-Shiller Home Price Index Series, which seeks to measure changes in the total value of all existing single-family housing stock.
  • Sectors are defined as follows:
  • Communication Market Indexes: 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.
  • 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.
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