The second quarter of 2022 is officially over. It’s time for a sector report card.

Inflation and rising interest rates remain the biggest factors impacting the markets. Every sector was down in Q2, and the S&P 500 turned in its worst half since 1970.

The S&P 500 was down 16.4% for the quarter, and is now down 20.6% on the year. The only sector in positive territory for the year is the energy sector, although the utilities sector was down less than 1%.

The energy sector had been up much more, but in early June it began a sell-off that took it into negative territory for Q2.

The consumer discretionary sector was in last place for the quarter, with a -25.5% return.

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Let’s dissect Q2 2022 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 four top-performing sectors were all sectors that historically perform best leading into a recession, or during a recession.

The top performer for the quarter was a defensive sector, Consumer Staples. It was down, but it was the closest to breakeven for the quarter. 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).

Another defensive sector, Utilities wasn’t far behind. This sector has now outperformed the S&P 500 for three consecutive quarters. The main headwinds for the sector continue to be inflation fears 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 Energy sector’s performance had a commanding lead over all other sectors until it turned down in early June. However, Energy was the only sector with a positive first half return, up 31.5%. It also leads all companies over the past year with a 12-month return of 38.9%. Energy and utilities are the only sectors with double-digit returns over the past year. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Health Care sector is another historical “recession-proof” sector, and it did outperform in Q2. 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 was 2021’s second-best performer with a return of 46.1%, but it was the first of a string of double-digit losers in Q2. 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 Industrials sector turned in a nice 2021 return of 21.1%, but it has turned down with the rest of the market. 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 final sector to outperform the S&P 500 in Q2 with a return of -15.9. 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 Financial sector had a decent Q1, so it outperformed the S&P 500 for the first half, even though it underperformed in Q2. 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).

Technology led the S&P 500 into bear market territory, and underperformed the S&P 500 for Q2 and for the first half of 2022. 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).

Communication Services continues to struggle, followed up its last place finish in 2021 with the second worst performance in Q2 2022. In Q1 it was also the only sector in the S&P 500 with a double digit loss, down 11.2%. 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).

The Consumer Discretionary sector regularly gets hammered during a recession as consumers cut back on discretionary items. The expectations for lower earnings has sent this sector to the bottom of the heap for Q2 and the first half of 2022. 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).

In summary, we are looking at some really tough market conditions. Gasoline prices have pulled back over the past two weeks, and if that continues it will help. But it’s still a bit too early to see any light at the end of the tunnel.

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