Thankfully, 2022 is finally over. Unless you are heavily invested in the energy sector, this is going to be a year you will want to forget.

However, the fourth quarter of 2022 provided a lot of reason for optimism. Ten of eleven sectors were up in Q4, but only two sectors had a positive return for the year. The S&P 500 was up 7.1% for the quarter, but was down 19.4% on the year.

This week, let’s dive into the Q4 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 top performer for the quarter, the Energy sector, was also the top performer for the year. Energy returned 22.7% in Q4, and for the year it was in a class of its own with a total return of 64.3%. No other sector came close to matching the Energy sector’s performance. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Industrial sector had the second-best Q4 with a 19.1% return. For the year the sector was down 5.6%, which was good for 5th place among all sectors. 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 next with a gain of 15.0% in Q4, but it lost 12.3% for the year. 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 gained 13.4% in Q4, and slightly outperformed Materials for the year with a loss of 10.6%. 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 also turned in a nice gain for Q4, returning 12.6%. 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).

Consumer Staples, another defensive sector, had the final double-digit gain in Q4 with a return of 12.5%. 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).

Utilities were the final sector that outperformed the S&P 500 in Q4, and it was the only sector besides energy to turn in a positive return for the year. The main headwinds for the sector continue to be 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).

Technology led the S&P 500 into bear market territory, and once again underperformed in Q4 with a return of 5.1%. But the sector has moved out of last place for the year, and is now only the third-worst performing sector for 2022 with a return of -27.7%. 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).

The Real Estate Index was a double-digit loser in Q3, but bounced back with a 3.7% gain in Q4. Nevertheless, Real Estate underperformed the S&P 500 in 2022 with a decline of 26.3%. 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.

Communication Services was barely above breakeven in Q4 with a gain of 0.5%. For the year, it was the worst performer, down 37.6%. After consecutive terrible years, I expect a bounce from this sector in 2023. The sector now has three consecutive quarterly double-digit losses. 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).

Consumer Discretionary was the only loser in Q4, declining 9.1%. For the year, the sector was the second-worst performer, down 36.3%. 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).

This really feels like a bottom for some of the underperforming sectors like Technology and Communication Services. I wouldn’t be surprised at all to see them beat the S&P 500 in 2023. I also feel like the market overall is likely to bounce, as the S&P 500 has seldom experienced back-to-back declines since the end of World War II. The catalyst for a move higher this year will likely be a softening of the Federal Reserve’s hawkish stance on interest rates.

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