State of the Markets: Best and Worst Performing Sectors of Q1 2023 — Tech Stocks Make a Comeback

The biggest market upset in the first quarter of 2023? The Tech Sector dominating every other sector. Here’s the final score.

The three top-performing sectors: Technology (+21.7%), Communication Services (+21.2%) and Consumer Discretionary (+16.2%).

The worst-performing sectors: Financials (-5.6%), Energy (-4.3%) and Health Care (-4.31%).

Many of the best-performing sectors in 2022, have become some of the worst-performers this year.

Tech stocks showed up in the first quarter

The Tech Sector has come roaring back — and even private startup valuations are showing signs of recovery. Instacart recently raised its valuation by 18% — after cutting it four times last year.

Here’s what’s driving tech up:

• Prospects of the Fed pausing rate hikes earlier than expected fueled their growth.
• Big tech companies with large cash balances would be less impacted by the events in the banking Sector.
• The Tech and Consumer Discretionary Sectors tend to lead the way during market recoveries.

With the rise, tech valuations have become much more expensive than they were before their recent 20% jump. Wealth Enhancement Group’s SVP says tech valuations are only justified if the Feds cut rates in 2023 — which she doesn’t expect.

Have markets bottomed?

That depends on how bad a recession could be and how the Fed responds. In the past, markets tended to bottom before the Fed paused rate hikes. And markets are pricing in the chances of the Fed stopping in May or June.

The market is in a tug-of-war between lower rate expectations and whether the economy will slow further, per BMO’s Chief Investment Strategist (WSJ).

• Worst-case scenario: We enter a bad recession — forcing the Fed to stop raising rates immediately (or even lower rates).
• Best-case scenario: We avoid a recession, inflation continues falling — and the Fed stops raising rates voluntarily.

Read: ETFs to take advantage of in a market bottom.