Sectors For Investors to Watch in 2023

Quinlyn Manfull
December 20, 2022

With a volatile macroeconomic climate and an impending recession, many investors may be wary of investing in the stock market. However, there are some sectors that have historically outperformed the market and retained value during market downturns.

Specifically, defensive market sectors such as utilities, healthcare and consumer staples have all outperformed the overall US market in 2022. Based on past performance, economists forecast this trend to continue in 2023.

While 2021 levels of economic growth are unlikely, that doesn’t mean there aren’t areas of the market where investors can generate returns.

Stock Market Outlook for 2023

The last year saw the S&P 500’s first annual double-digit percentage loss since the Great Recession, down more than 17% for the year in late December.

Investors should keep in mind certain overall risks for 2023, including headwinds from both Federal Reserve interest rate hikes and high inflation.

The equity market tends to feel the impacts of inflation and interest rates more so than other asset classes such as real estate or Contemporary Art. Alternative assets are not correlated or negatively correlated with stock market returns, meaning they can help hedge against inflation and interest rate hikes. 

But for investors looking to maintain a level of allocation to equities should know that not every share price will be impacted to the same degree.

Growth Stocks vs. Value Stocks

While the overall equities market valuations struggled in 2022, growth stocks were hurt more by rising interest rates.

What are growth stocks and value stocks?

  • Growth Stocks: Companies that investors believe will outperform the overall market
  • Value Stocks: Companies that investors believe are undervalued by the market

This is a reversal of the previous trend of growth stocks outperforming value by a wide margin. However, during central bank quantitative tightening periods, value stocks begin to outperform. This was seen during the last period of rate hikes from 2003-2007.

Compared to the overall market, value stocks far outperformed — the Vanguard Value ETF was down only 1.7% for the year compared to over 17% for the S&P 500 and over 27% for the Vanguard Growth ETF.

With investor sentiment remaining low due to market volatility and recession concerns, many investors will likely continue to opt for safer investments in value stocks instead of taking risks with growth stocks.

What are Defensive Stocks?

Defensive sectors are industries or sectors of the economy that are considered relatively stable and have provided consistent revenue growth during economic downturns and stock market volatility.

These industries typically produce goods or services that are essential or necessary for everyday life, such as healthcare, utilities and consumer staples. Because these industries are considered more stable and less sensitive to economic conditions, they are often referred to as defensive sectors.

Because these companies maintain stable cash flows and strong balance sheets, they also tend to provide consistent dividends to shareholders. Dividend stocks can help investors maintain liquidity during market downturns when other cash is tied up in hard assets.

During market downturns, investors often pivot away from traditional assets such as stocks and bonds in order to gain exposure to non-correlated markets. This is why the popularity of alternative assets has been growing in recent years. 

However, most financial advisors still recommend some allocation to the equity market, so defensive stocks can provide some level of diversification and risk mitigation compared to cyclical stocks. 

These sectors are considered safer places to invest compared to more cyclical industries, such as technology or consumer discretionary, which are more sensitive to economic changes.

Examples of defensive sectors include:

  • Healthcare: This sector includes companies involved in the production and distribution of healthcare products and services, such as pharmaceuticals, medical devices, and healthcare providers
  • Utilities: This sector includes companies involved in the production and distribution of essential services, such as electricity, gas and water
  • Consumer staples: This sector includes companies that produce and sell essential household items, such as food and beverages
  • Telecommunications: This sector includes phone and internet service providers
  • Real estate: This sector includes companies involved in the ownership, development, and management of real estate properties, such as apartment buildings, office buildings and shopping centers

Top Sectors to Watch in 2023

Consumer Staples Sector

“Consumer staples” refers to necessary products such as groceries, hygiene products and household supplies. These are products that people buy regardless of economic conditions.

Because consumers can’t avoid buying cleaning supplies and groceries during recessions the same way they can stop traveling or going out to eat, these companies tend to generate steady cash flow during both bull and bear markets.

Consumer staples also tend to have strong market positions during periods of high inflation, because the cost of inflation can often be passed on to the consumer. That helps to lift revenue for these companies.

Healthcare Sector

Along the same vein as consumer staples, healthcare is an industry that is insulated from many market fluctuations. People need to buy medication and go to the doctor even when they are pinching pennies.

Major pharmaceutical companies and medical device makers are some of the most stable defensive stocks because people have no choice but to purchase life-sustaining medications.

Energy Sector (Including Renewables)

The energy sector should continue to generate substantial cash flows in the next year. In the event that inflation doesn’t ease and the Consumer Price Index (CPI) spikes again, energy prices would be pushed higher again.

Regardless of inflation easing or remaining high, energy is a defensive sector that is relied on by practically every consumer and every manufacturer.

Supply constraints felt during the pandemic due to lockdowns, as well as geopolitical conflict in Europe, have kept energy inventories tight and prices high.

While the pandemic supply chain issues also caused some delays on a global green energy transition, the heightened cost of oil and gas has increased the average consumer’s interest to shift away from nonrenewable resources.

With fewer constraints and trillions of federal dollars invested in renewable infrastructure, the renewable energy industry — including electric vehicles and solar panels — should see stable growth in 2023.

The Economist predicts EV sales to rise by 25% in 2023, while sales of gas cars and commercial vehicles will likely fall.

Utilities Sector

Water, gas and electric utilities are all defensive stocks, because consumer demand remains constant regardless of market downturns.

Regardless of high inflation or interest rate hikes, people still need to turn the lights on and take showers, so these sectors tend to outperform the overall market in rocky environmental climates.

How You Can Invest in Sectors

Investors can allocate funds to the sector either through investing directly in single-name stocks within or across different sectors or through investing in a thematic or sector-based fund.

Many long-term investors choose to purchase sector-based mutual funds or ETFs in order to more easily gain diversified exposure to an entire industry or investment theme.

However, short-term investors may prefer to invest in single names because they want to execute short-term speculation in the market.

For example, an investor interested in the Internet and Telecommunications sectors may be bullish specifically on semiconductors and want to make a speculative play on Nvidia (NVDA).

However, a long-term investor may want exposure to the entire industry and purchase a mutual fund that has stock in numerous large-cap technology names such as Nvidia (NVDA), Amazon (AMZN), Microsoft (MSFT) and more.

The Bottom Line

The above-mentioned sectors are those that Wall Street economists forecast to see earnings growth during market slowdowns, but there will always be a variety of returns within each sector as well.

When determining which stocks, ETFs or mutual funds to invest in, reading balance sheets, earnings releases and company news can always help to find the best investment opportunities.

Individual investors may also benefit from working with a financial advisor to strategize on portfolio allocation.

This article is for informational purposes only, and should not be construed as investment advice. 


Quinlyn Manfull
Quinlyn Manfull is a a New York based finance writer covering alternative investments, crypto, and NFTs. Previously she worked as an Investment Analyst for HSBC Private Bank covering capital markets. Her byline has been featured in the Anchorage Daily News, and her university newspaper, The Willamette Collegian. Quinlyn earned a B.A. in Economics from Willamette University and holds her FINRA Series 7 License.