Stock market winners in 2023 are last year’s losers

When it comes to market sectors, last year’s losers are this year’s winners.

The S&P 500’s best performers are Technology (XLK), Communication Services (XLC), and Consumer Discretionary (XLY), up about 32%, 32% and 22%, respectively, so far this year. It’s worth noting those three sectors were the worst performers of 2022 as the Federal Reserve hiked interest rates and investors worried about a looming recession.

Investors who stuck with last year’s laggards, have seen their luck change in 2023.

Even the badly beaten Homebuilders ETF (XHB) is up 24% year-to-date. The exchange traded fund which includes names like Lennar (LEN) and Toll Brothers (TOL) was down almost 29% in 2022 amid rising mortgage rates.

In contrast, energy stocks, the superstars of 2022, have lost their luster this year. Energy Select (XLE), is down more than 6% YTD. Keep in mind, the sector gained a whopping 64% in 2022.

“Energy is negatively correlated with tech as investors tend to use energy stocks as a source of funds to invest in tech,” Jay Hatfield, CEO of Infrastructure Capital Management, told Yahoo Finance.

That trend has also been accentuated amid demand concerns for oil given China’s weaker-than-expected recovery once Covid lockdowns were lifted.

Much of the tech-fueled rally this year comes amid an expectation of a Fed rate pause by mid-year, low unemployment and a frenzy over generative artificial intelligence.

The banking crisis in March caused a steep sell-off in financials and other cyclical stocks as investors moved towards technology names.

“Large cap tech stocks were perceived as a safe haven during the banking crisis as most tech stocks have low debt or even net cash positions. Then the AI boom started as Chat GPT was released, fueling further rotation into tech stocks,” Hatfield said.

The trend accelerated as chipmaker Nvidia (NVDA) posted a better-than-expected quarter and blockbuster guidance. The stock, which was down 48% last year, has come roaring back 162% since the start of 2023.

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Overall, the tech-heavy Nasdaq is up roughly 25% year-to-date while the S&P 500 has gained 11%. Yet strategists point to the lack of breadth of 2023’s rally as flashing a warning sign.

“We may be on the cusp of a new bull market here, but I think this bull market really deserves an asterisk until we see some broader participation. And right now, we’re just not seeing it,” Adam Phillips, Managing Director of Portfolio Strategy at EP Wealth Advisors recently told Yahoo Finance Live.

Investors piling money into the AI trade has been feeding the concentration of market gains among a handful of companies.

Bank of America strategist Michael Hartnett calls these out-performers, the ‘Magnificent Seven’ — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA).

The ‘Magnificent Seven’ account for 83% of the Nasdaq 100’s $4 trillion growth in market valuation in 2023. Apple and Microsoft have each gained more in value than the entire bottom 93 stocks, Yahoo Finance’s Jared Blikre recently noted.

“When you’re counting on just a few stocks to drive performance, that, historically, has not ended well,” Jim Tierney, AB chief investment officer of Concentrated US Growth, told Yahoo Finance Live.

“The market has to broaden out, or at some point, these 8 or 10 stocks just lose— run out of gas.”

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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