Now that 2023 is in the books, it’s time to look back at the winners and losers for the year. In addition, it’s important to note the top performers in Q4, so we can see which sectors have momentum as we head into the new year.

So, let’s dive into 2023 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the quarter.

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.

Read This Story: 2023 and 2024: A Look Back, a Look Forward

The S&P 500 gained 11.2% for the quarter and 24.2% on the year. Overall, ten of eleven sectors turned in a positive return in Q4. For the year, eight of eleven sectors were in positive territory, but only three of those sectors beat the S&P 500 return.

Here was the sector breakdown for the year.

If you don’t understand why so few sectors outperformed the S&P 500, allow me to explain. The S&P 500 is top heavy with technology companies. If every company in the index had an equal weighting, then each company in the index would contribute 1/500th, or 0.2%, to the overall index performance.

But that’s not the way it is. Microsoft (NSDQ: MSFT) and Apple (NSDQ: AAPL) are the largest holdings in the index, with a weighting of nearly 7% each in the index. Technology companies make up eight of the ten largest holdings. That means that a big year in technology can drive the S&P 500 higher than the average sector performance, which was the case in 2023. Note that the opposite happened in 2022, as technology companies dragged down the S&P 500.

The Superstars

There were three clear stars for the year.

Technology was the year’s best performer, rising 56.0%. The return in Q4 was second best among all sectors, rising 17.7%. 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).

In second place for the year was Communication Services. The sector added a 11.1% return in Q4 to bring the 2023 return to 52.8%. 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).

The final sector that outperformed the S&P 500 in 2023 was Consumer Discretionary. For the quarter this sector gained 11.3% to bring the 2023 gain to 39.6%. 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).

The Laggards

There is a steep drop from the three top performers down to the sectors that lagged the S&P 500.

The Industrial sector slightly beat the S&P 500 in Q4 with a gain of 13.1% but was well behind the index for the year with a gain of 18.1%. 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 Materials sector was in 5th place for the year with a gain of 12.5% but most of that was from the 9.7% gain in Q4. 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 Real Estate Index struggled with rising interest rates in 2023, but it finally broke out in Q4 with the quarter’s top gain of 18.8%. That flipped the sector from the red to the black, with an overall gain of 12.4% for the year. 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.

The Financial sector was down in Q3 but bounced back in Q4 with a gain of 13.9%. That was good enough to push the sector to a 12.0% gain for the year. 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 Health Care sector was in negative territory for most of the year, but Q4’s 6.4% return allowed it to eke out a 2.1% gain for the year. It was the final sector to turn in a positive return for the year. 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 Losers

The three sectors that lost ground in 2023 are defensive sectors that tend to do well during recessions.

After leading all sectors in 2021 and 2022, a year ago I predicted that the Energy sector would underperform in 2023. Falling energy prices in Q4 led to the Energy sector losing 6.4% in the quarter. That pushed the sector to a negative return of 0.6% for the year. Performance was uneven within the sector, though, with upstream companies losing money, but midstream and downstream companies turning in double-digit gains. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

Consumer Staples gained 5.5% in Q4, but that wasn’t enough to prevent a 0.8% decline on the year. 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 Utilities sector was the year’s biggest loser, with a decline of 7.2%. Utilities had been in double-digit negative territory for much of the year in response to rising interest rates, but it did notch a Q4 gain of 8.5%, partially in response to a pivot by the Federal Reserve away from interest rate hikes.

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).

Overall, it was an unusual year. A well-diversified portfolio probably lagged the S&P 500, simply because most sectors underperformed the benchmark. The average portfolio probably looks more like the S&P 500 median sector performance, which was up about 12% in 2023. But, anyone who was primarily defensively positioned could have easily turned in a negative performance in 2023.

The new year is likely to see 2023’s underperformers rise in response to interest rate cuts. Utilities, for example, should benefit significantly in 2024.

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