The second quarter and first half of 2023 closed on Friday. The S&P 500 returned 8.3% for the quarter and is now up 15.9% on the year. But this rally has been narrow. The S&P 500 is weighted heavily toward technology companies, and those have undergone a strong rally. Overall, however, only three sectors have outperformed the S&P 500 year-to-date.

This week we dive into the Q2 and H1 2023 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the year.

11 Sector Review

Select Sector SPDRs are targeted exchange-traded funds (ETFs) that divide the S&P 500 into 11 sector index funds. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, and Utilities. The 11 Select Sector SPDRs represent the S&P 500 as a whole.

The average sector performed worse than the S&P 500, which is an indication that the rally was narrow. Eight of eleven S&P 500 sectors underperformed the index, with two of those sectors closing down for the quarter. Year-to-date, four of eleven sectors are in the red.

Here was the sector breakdown for the second quarter.

Q2 performance was very similar to Q1’s. As in Q1, eight of 11 sectors underperformed the S&P 500. Income sectors significantly underperformed, primarily a result of rising interest rates.

The Dow Jones Industrial Average, by comparison, only returned 3.4% for the quarter, and now lags the S&P 500’s YTD performance by more than 10%.

The top performer for the quarter, Technology, led the S&P 500 into bear market territory last year and was one of 2022’s worst performers. But the sector has been on fire this year. Technology had a 15.4% return in Q2 to bring the YTD return to 40.3%.

This sector includes technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment. Components of this ETF include Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), and Intel (NSDQ: INTC).

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Consumer Discretionary was the second-worst performer in 2022 (down 36.3%), but it was the 3rd best performer in Q1 and rose to the 2nd spot in Q2. For the quarter this sector returned 13.8%, and it is now up 32.1% YTD. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing. It is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS).

Slipping from 2nd place in Q1 to 3rd in Q2 was Communication Services, last year’s worst performer with a decline of 37.6%. The sector added a 12.4% return in Q2 to bring the YTD return to 36.2%. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media and services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).

Besides those three sectors, all other sectors underperformed the S&P 500. The Industrial sector returned 6.5% for the quarter and 10.2% YTD. Industrial sector component industries include building products, construction and engineering, electrical equipment, conglomerates, machinery, and aerospace/defense. Important constituents of the Industrials sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

The Financial sector was in last place in Q1 but bounced back with a 5.3% return in Q2. But YTD, the sector is still down 0.5%. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.A, BRK.B), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C).

The Materials sector was in 6th place for Q2 with a gain of 3.2% in Q2 and is up 7.7% YTD. This sector includes companies that produce chemicals, construction materials, metals and mining, and paper and forest products. Among its largest components are DowDuPont (NYSE: DWDP) and Sherwin-Williams (NYSE: SHW).

The Health Care sector made a move higher. It returned 2.9% in Q2, but that was a marked improvement from previous quarters. YTD the sector is still in negative territory though. The sector includes health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Bellwethers in the health care sector include Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE).

The Real Estate Index underperformed the S&P 500 in 2022 and continues to do so in 2023. In Q2 the sector’s 1.8% return lagged the S&P 500 by 6.5%. This index consists primarily of real estate management and development companies and real estate investment trusts (REITs). Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

Consumer Staples, another defensive sector, ended Q2 where it ended Q1. YTD the sector is up only 0.7%. Making up this sector are companies involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).

The Energy sector declined another 1.1% in Q2, bringing the YTD decline to 5.4%. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Utilities sector has fallen into last place for both Q2 and YTD, with respective declines of 2.5% and 5.7%. The declines were primarily driven by inflation and rising bond rates. Companies that produce, generate, transmit or distribute electricity or natural gas predominantly make up the Utilities sector. Component companies include NextEra Energy (NYSE: NEE), Duke Energy (NYSE: DUK), and Dominion (NYSE: D).

The performances of several sectors are in line with predictions I made in late 2022 and early 2023. I wrote that I thought the energy sector would underperform this year, but that I thought we had put in a bottom for Technology and Communication Services. Those three sectors have performed in line with those predictions.

If you have a well-diversified portfolio, then you are probably lagging the S&P 500, simply because the rally has been concentrated in just a few sectors. Nevertheless, you should be in positive territory YTD, and if you are well diversified in defensive sectors, you should be well-prepared if the economy does slip into recession in the second half of the year.

Editor’s Note: if you’re nervous about mounting market risks, I suggest you consider the advice of our colleague, Jim Pearce.

Jim Pearce is chief investment strategist of our premium service Mayhem Trader. He has spent the past year perfecting a powerful indicator that’s designed to make money in a hostile market.

Jim has a proven knack for reaping profits from Wall Street chaos. To learn more, click here.

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