Best Performing Sectors for Stocks in 2023
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Based on their specific line of business, public companies are categorized into sectors.
The stock market sectors categorize companies operating in related industries.
The Global Industry Classification Standard (GICS) serves as the primary framework for classifying stock market sectors.
GICS classifies the stock market into 11 sectors, and it goes even further by subdividing the market into 24 industry groups, 69 industries, and 158 sub-industries.
The composition of these 11 GICS sectors is not fixed and evolves.
As an example, the real estate sector was introduced to the list in 2016 to reflect the growing significance of the residential and commercial property industry.
The sector-related information provides a general idea of how the underlying companies might perform.
Investing in stocks involves considering various economic sectors, and here’s why sectors matter:
Sectors offer diversification, reducing risk. If one sector falters, gains in other sectors can offset losses.
— Economic Cycles
Sectors behave differently in economic cycles. Tech thrives in expansions, while utilities stay stable during downturns, aiding your investment choices.
— Risk Management
Assess sector-specific risks; some, like tech, are riskier than staples. This insight guides your risk strategy.
— Portfolio Strategy
Align sector allocation with your strategy. Growth investors favor tech, while value investors lean toward finance.
— Company Analysis
Analyze sectors to spot leading companies with strong positions.
— Diversified Exposure
Sector-focused funds offer efficient exposure to industries you can’t research individually.
— Identifying Trends
Recognize long-term sector trends, e.g., renewable energy in the energy sector.
— Risk Identification
Be aware of unique sector risks, like regulatory changes.
— Performance Comparison
Compare sector performance to inform investment choices.
— Future Prospects
Invest in sectors with growth potential, like healthcare due to aging populations.
Understanding sectors is crucial for stock investing, aiding diversification, risk management, and alignment with financial goals and market conditions.
Today, I am going to discuss some of the best sectors that have performed well in 2023.
Note that the sectors are expected to perform well over the long run rather than a shorter timeframe.
Disclaimer: Note that the information presented within this article is for educational purposes.
This data should not be considered actual investment advice, and it is wise to consult a financial expert before investing.
So, let us begin discussing the best sectors to consider for the long term.
Investing in technology stocks has gained significant popularity in recent years, and this trend is well-founded.
The technology sector has consistently outperformed the broader stock market over the last decade.
Research and Markets predicts global tech market growth, from $8.18 trillion in 2022 to $8.85 trillion in 2023, at an 8.2% annual rate.
The market is expected to reach $11.99 trillion by 2027, growing at a 7.9% annual rate. Tech remains a solid long-term investment.
In Q1 2023, Microsoft (NASDAQ: MSFT) was the top tech stock for 943 tracked hedge funds.
On July 25, Microsoft announced Q2 2023 results, with an EPS of $2.69 and revenue of $56.2 billion, beating Wall Street predictions by $0.14 and $710 million.
In the first quarter, 289 hedge funds were bullish on Microsoft, up from 259.
The Bill & Melinda Gates Foundation Trust holds 39.2 million shares valued at $11.3 billion.
L1 Capital International Fund stated in its Q2 2023 investor letter that Microsoft greatly benefits from AI investments, including:
⁃ Integration into core products
⁃ AI services on Azure
The long-term financial impact is uncertain, but they believe it will be significant.
Microsoft’s stock has risen 33% in the past year, no longer considered undervalued, and they have reduced their investment while maintaining a sizable position.
Here are ten compelling reasons to consider investing in tech stocks:
— Impressive Historical Performance
Over the past decade, the tech sector has delivered an annualized return of nearly 13%, while the S&P 500 yielded just over 7%.
In the last 20 years, tech stocks returned an annualized 16%, more than double the broader market.
— Innovation and Excitement
The technology sector is home to some of the most innovative and exciting companies globally.
Companies like Amazon, Facebook, and Google continually push boundaries, introducing products and services that transform our daily lives and work.
— Rapid Industry Growth
Technology is one of the fastest-growing industries worldwide, with global spending on IT projected to reach trillions of dollars in the future.
— Lucrative Growth Opportunities
Many tech companies are still in their early stages of growth, offering investors significant opportunities for long-term capital appreciation.
For instance, Amazon’s shares have surged over 2,000% since its 1997 IPO.
— Solid Fundamentals for Growth
Tech stocks often exhibit robust financial fundamentals, with numerous companies reporting double-digit sales and earnings growth.
For example, Facebook recently reported revenue and earnings growth of 47% and 63%, respectively.
— Favorable Demographics
The tech sector benefits from favorable demographic shifts, as younger generations embrace and rely on technology.
By 2025, millennials are expected to make up 75% of the workforce.
— Resilience in Economic Downturns
While the broader stock market can be volatile during economic downturns, tech stocks historically demonstrate more resilience.
For example, during the 2008 financial crisis, the tech-heavy Nasdaq Composite Index rose while the S&P 500 declined by nearly 40%.
— Attractive Valuations
Despite their impressive historical performance, many tech stocks still trade at relatively attractive valuations.
For instance, the forward P/E ratio for the tech sector currently stands at around 18, below the historic average of 20 for the S&P 500.
— Dividend Growth Potential
Numerous tech companies now offer dividends, and some have substantial dividend growth potential.
For instance, Apple’s dividend has grown by over 25% annually in the past five years.
— Long-Term Contributing Factors
The technology sector benefits from several long-term tailwinds, including:
⁃ Continued global economic growth
⁃ Proliferation of mobile devices
⁃ Rise of artificial intelligence
These trends are anticipated to persist for many years, providing strong support for tech stocks.
Research Dive projects that the global health and wellness market was valued at $4,712.5 billion in 2021.
The sector is said to experience a 10.9% compound annual growth rate (CAGR), reaching $12,850.3 billion by 2031.
Investing in the healthcare sector for the long term is a sound choice.
UnitedHealth Group Incorporated (NYSE: UNH) is a preferred healthcare stock among 943 tracked hedge funds.
In Q2 2023, UnitedHealth reported a Q2 non-GAAP EPS of $6.14 and revenue of $92.9 billion, surpassing Wall Street estimates by $0.16 and $1.94 billion.
As per Insider Monkey’s Q1 database, 116 hedge funds were bullish on UnitedHealth, up from 110 in the previous quarter.
Rajiv Jain’s GQG Partners is the largest shareholder with 4.8 million shares valued at $2.28 billion.
L1 Capital International Fund discussed UnitedHealth in its Q2 2023 investor letter, emphasizing the increased exposure to healthcare in their portfolio.
They see healthcare as less macro-sensitive and have been selectively investing in high-quality healthcare businesses.
They mention UnitedHealth as a top 10 holding.
The healthcare sector encompasses companies using innovation to enhance quality of life and productivity.
Life-saving innovations like pacemakers, joint replacements, cancer drugs, and vaccines are invaluable.
While not as dominant in the market as tech giants, the healthcare sector offers long-term investment opportunities.
Key reasons to invest in healthcare are listed below:
— Earning Potential
Healthcare has witnessed substantial annual growth in the past five years, ranking 3rd in growth rate after IT and financials.
— Aging Population
Countries with a growing elderly population will see increased spending on healthcare services and medicines, presenting opportunities.
— Pandemic Impact
The COVID-19 crisis highlighted the vital role of healthcare and led governments to support innovative healthcare solutions.
— MedTech Advancements
Medical technology (MedTech) is expanding healthcare through digitization, artificial intelligence, 3D printing, and more.
Healthcare sector earnings exhibit lower volatility, making it suitable for long-term investment.
In conclusion, healthcare investments offer the potential for generous returns, but stock prices can influence outcomes.
The healthcare market is vast, with various companies available for investment, so research is essential to identify high-potential options.
Consumer cyclical comprises stocks heavily influenced by economic conditions and the business cycle, including sectors like:
The Consumer Cyclical sector proves itself as a sector of interest.
In the second quarter of 2023, the US Morningstar Consumer Cyclical Index outperformed the overall market by 260 basis points.
Median stocks in this sector are undervalued, trading at an 18% discount to fair value estimates.
Additionally, 52% of the sector’s coverage falls into 4- or 5-star territory according to Morningstar.
Amazon.com, Inc. (NASDAQ: AMZN) is a preferred consumer cyclical stock among hedge funds.
On July 25, Amazon.com, Inc. (NASDAQ: AMZN) and iRobot Corporation (NASDAQ: IRBT) revised their merger deal, adjusting the price per share to $51.75.
In the first quarter, 243 hedge funds held a bullish stance on Amazon.com, Inc. (NASDAQ: AMZN), up from 240 in the previous quarter.
Harris Associates is a significant holder with 22.8 million shares valued at $2.3 billion.
The Ithaka Group discussed Amazon.com, Inc. (NASDAQ: AMZN) in its Q2 2023 investor letter.
This emphasizes Amazon’s strong position in e-commerce, AWS cloud infrastructure, and digital advertising.
The benefits of Investing in Cyclical Stocks are as follows:
— Growth Opportunity
Cyclical stocks offer growth potential during economic expansions as demand for their products and services increases with a growing economy.
— Higher Returns
These stocks can yield higher returns during economic growth due to increased earnings, potentially leading to stock price appreciation.
Some cyclical stocks offer dividends, providing investors with a regular income stream.
— Low Valuation
During economic downturns, cyclical stocks may be undervalued, offering investment opportunities at lower prices.
If the economy rebounds, these stocks may appreciate.
Cyclical stocks can be a rewarding investment strategy during economic expansions.
However, they come with risks, including volatility, company-specific risk, timing risk, and interest rate risk.
Investors can employ diversification, sector rotation, and dollar-cost averaging strategies when investing in cyclical stocks.
Nevertheless, evaluating risks and rewards and considering personal financial goals and risk tolerance is essential.
Investing in cyclical stocks offers growth potential but should be approached with careful consideration of financial goals and risk tolerance.
The financial services sector encompasses various firms providing financial services to individuals and businesses, including:
⁃ Investment Organizations
⁃ Finance companies
⁃ Real estate brokers
⁃ Insurance companies
The financial services sector plays a vital role in the economy, with large conglomerates and a range of smaller companies operating within it.
As per the International Monetary Fund (IMF) finance and development department, financial services involve consumers and businesses acquiring financial goods.
For example, payment system providers offer financial services by facilitating fund transfers between payers and recipients.
This includes credit and debit card transactions, checks, and electronic funds transfers.
In this sector, companies manage money and provide services like financial advising, which involves asset management and client guidance rather than direct product provision.
Financial goods, on the other hand, are tangible items that persist beyond the initial transaction, such as mortgage loans, stocks, bonds, loans, commodity assets, real estate, and insurance policies.
Key Information on the Financial Services Sector:
The financial services sector is a driving force in a nation’s economy, facilitating capital flow and liquidity in the market.
A strong sector leads to economic growth, higher consumer earnings, increased confidence, and greater access to credit for large purchases.
Conversely, a failing financial services sector can negatively impact a country’s economy, potentially leading to a recession.
The sector’s health has broader implications, with a significant influence on the overall economy’s prosperity.
The sector comprises several segments, including retail banking, commercial banking, and investment banking.
Retail banking serves individuals, offering services like checking accounts, savings accounts, mortgages, loans, and credit cards.
Commercial banking caters to businesses, providing account services and credit products tailored to their needs.
Investment services allow individuals to access financial markets, either through human or self-directed online brokers who facilitate buying and selling securities.
Financial advisors offer portfolio management and advice, while robo-advisors use automated algorithms for portfolio allocation and trades.
High-net-worth individuals have additional investment options.
Hedge funds, mutual funds, and investment partnerships invest in financial markets, charging management fees.
They require custody services, legal advice, compliance, and marketing services, and use software applications for portfolio management.
Private equity funds, venture capital providers, and angel investors invest in companies in exchange for ownership stakes or profit participation.
Insurance services protect against death, injury, property loss or damage, and liability or lawsuit.
This includes life insurance, disability income insurance, health insurance, homeowners insurance, car insurance, and professional liability insurance.
The global financial services market was valued at $25.51 trillion in 2022, according to Growth Market Reports.
This is along with a projected CAGR of 9.7% from 2023 to 2031, exceeding $58.69 trillion by 2031.
This sector is a promising choice for investment.
Visa Inc. (NYSE: V) is a preferred stock in the financial services sector.
Visa operates as a global payments technology company, recently announcing a quarterly dividend of $0.45 per share.
It had 173 hedge funds bullish on it in the first quarter, with Chris Hohn’s TCI Fund Management being the largest stakeholder.
Manole Capital Management expressed their preference for transaction-based businesses.
Examples include the payments industry, with companies like Visa Inc. (NYSE: V), which generate revenue and profit per transaction, without the credit risk associated with traditional banks.
Investing in the financial services sector offers diverse opportunities, with the potential for substantial returns.
However, it’s crucial to assess individual financial goals and risk tolerance before venturing into this sector.
The Communication Services sector comprises a wide range of industries.
This includes telecommunication services (diversified and wireless) and media, entertainment, and interactive media and services.
During the pandemic, stay-at-home behaviors benefited certain companies within the sector.
This is particularly due to increased social media usage and a growing demand for streaming entertainment.
However, the rapid enrollment pace in these services may slow as consumers return to traditional entertainment options.
Traditional broadcast and cable TV advertisers faced challenges but are swiftly adapting to online mediums.
The rollout of fifth-generation (5G) cellular technology is supporting wireless service revenues and equipment sales.
Nevertheless, major social media companies face competitive advantages due to their dominance in search engines and social media.
Still, they confront emerging antitrust concerns, challenges from Apple’s ad-blocking feature, and potential market saturation.
Looking ahead, the ongoing expansion of 5G technology is expected to continue driving growth within the sector.
This is expected to create higher demand for equipment and services.
Upgrading networks will require substantial capital investment, with potential government infrastructure initiatives providing subsidies and investment.
The Russian-Ukraine conflict and the relevant political response have introduced significant uncertainty into the economic and market landscape.
The rise in commodity prices, tightening financial conditions, and anticipated Federal Reserve interest rate hikes further complicate the outlook for sector performance.
Maintaining sector allocations in line with the overall market is currently advisable until a clearer picture emerges.
Positives for the Communication Services sector are as follows:
⁃ Social media companies enjoy competitive advantages.
⁃ 5G deployment offers growth potential.
⁃ Government infrastructure investment may ease 5G capital expenditure.
⁃ Streaming entertainment services have seen strong enrollments, although the pace may have peaked.
Negatives for the sector include:
⁃ Apple’s ad-blocking feature may affect ad revenues for social media companies.
⁃ Antitrust regulatory trends pose challenges for search engine and social media firms.
⁃ Market saturation and new competition could limit pricing power.
⁃ The sector’s market capitalization is heavily concentrated in the top two stocks (Facebook and Google), which can significantly impact sector performance.
The Communication Services sector remains an attractive long-term investment.
According to Allied Market Research, the global telecommunication services market was valued at $1602.5 billion in 2021.
This is along with an estimated growth to $2556.2 billion by 2031, projecting a compound annual growth rate (CAGR) of 5.1% from 2022 to 2031.
Meta Platforms, Inc. (NASDAQ: META) is a favored stock in the Communication Services sector among hedge funds.
The company recently announced plans to introduce AI-powered chatbots with distinct personalities on its social media platforms, starting in September.
These chatbots will take on different characters to enhance user engagement.
As per Insider Monkey’s first quarter database, Meta Platforms, Inc. (NASDAQ: META) was present in 220 hedge fund portfolios.
Especially compared to 194 in the previous quarter.
Philippe Laffont’s Coatue Management holds a significant stake in the company, with 8 million shares valued at $1.70 billion.
In the second quarter of 2023, Wedgewood Partners Large Cap Focused Growth Fund reported that Meta was the top contributor to performance.
The company managed to align adjusted expenses with revenue growth, boosting confidence in future profitability.
Their accelerated revenue growth is attributed to successful product investments.
Meta has invested in valuable artificial intelligence (AI) intellectual property, particularly in ranking and recommendation systems across their suite of products.
Despite the recent attention on “Gen-AI,” Meta’s years of research and development in generative AI tools have them well-prepared.
They expect minimal expense escalation due to this phenomenon and consider Meta their largest holding.
Other Notable Sectors
Some other notable sectors that are worth adding to your watchlist, especially if you are a long-term investor, are:
⁃ Basic Materials
⁃ Consumer Defensive
⁃ Real Estate
Most sectors with certain large-cap companies usually have a good performance over the long run.
However, certain small-cap companies may tend to be a little risky and investors should be cautious while investing in them.
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Therefore, it is wise to leave the matter to experts if you want to make the most of your investments.
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Adam is an internationally recognised author on financial matters, with over 735.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.