In this article, we discuss the 11 best sectors to invest in heading into 2023. If you want to see more of the top sectors to consider, check out 5 Best Sectors To Invest In Heading Into 2023.
With a recession on the horizon, many investors are cautious when it comes to putting their money in the equity market. However, although the S&P 500 is in bear territory, there are some sectors which are performing better than the others. In 2022, safe haven assets and defensive market sectors like utilities, healthcare, consumer staples, and gold have outperformed relative to the overall US market. The energy sector has also gained close to 50% year-to-date due to the Russian invasion of Ukraine.
Although defensive sectors are considered to be more lucrative investments heading into a recessionary environment, if the central bank manages to slow down interest rate hikes after achieving about 5.0% to 5.5%, then technology and high growth stocks can potentially recover. If that is the case, technology and semiconductor sectors are some of the ETFs that may outperform based on the sector rotation model.
Investing in exchange traded funds allows investors affordable access to legacy large-cap firms like AbbVie Inc. (NYSE:ABBV), NVIDIA Corporation (NASDAQ:NVDA), and ServiceNow, Inc. (NYSE:NOW).
Our Methodology
We tallied the sectors of the 100 most popular stocks among hedge funds and present the 11 most frequently invested sectors by the 920 hedge funds tracked by Insider Monkey in the third quarter of 2022.
Photo by Mirza Babic on Unsplash
Best Sectors To Invest In Heading Into 2023
11. Telecommunications Equipment
In 2022, the telecom industry faced new opportunities and challenges alike, driven by a dynamic regulatory, technological, and competitive backdrop. The $1 trillion Infrastructure Investment and Jobs Act (IIJA) authorized in November allots $65 billion for ongoing broadband adoption and deployment. The global telecom equipment market was worth $538.9 billion in 2021 and is forecasted to reach $967.9 billion by 2030, indicating a CAGR of 6.9% during the forecast period of 2022 to 2030.
One of the best telecommunications equipment stocks to invest in according to elite hedge funds is T-Mobile US, Inc. (NASDAQ:TMUS), a Washington-based company that provides mobile communications services in the United States, Puerto Rico, and the United States Virgin Islands. The company also offers wireless devices, including smartphones, wearables, tablets, and other mobile communication devices. For full-year 2022, T-Mobile US, Inc. (NASDAQ:TMUS)’s postpaid net customer additions are expected to be between 6.2 million and 6.4 million, an increase from the prior guidance of 6.0 million to 6.3 million.
Tigress Financial analyst Ivan Feinseth on November 15 raised the price target on T-Mobile US, Inc. (NASDAQ:TMUS) to $202 from $195 and reiterated a Buy rating on the shares. The company’s growing ability to leverage its “massive “5G high-speed network will continue to drive increasing customer gains and revenue growth”, the analyst told investors in a research note. The analyst said T-Mobile US, Inc. (NASDAQ:TMUS)’s leadership position in 5G continues to support “industry-leading postpaid service revenue and cash flow growth.”
According to Insider Monkey’s Q3 data, 100 hedge funds were long T-Mobile US, Inc. (NASDAQ:TMUS), compared to 96 funds in the last quarter. Warren Buffett’s Berkshire Hathaway is the largest position holder in the company, with a stake worth $703.3 million.
Like AbbVie Inc. (NYSE:ABBV), NVIDIA Corporation (NASDAQ:NVDA), and ServiceNow, Inc. (NYSE:NOW), T-Mobile US, Inc. (NASDAQ:TMUS) is one of the stocks favored by elite hedge funds.
In its Q4 2021 investor letter, ClearBridge Investments shared its stance on T-Mobile US, Inc. (NASDAQ:TMUS):
“As mentioned, the communication services sector has come under some pressure, and irrational pricing competition has negatively impacted wireless industry growth and profitability of late, weighing on T-Mobile. Faced with these headwinds, and with pressure from other wireless carriers and cable companies that could cause the company to cede share in subscriber growth in 2022, we exited our position in the fourth quarter.”
10. Internet and Information Services
Internet and Information Services is one of the best sectors to invest in heading into 2023. The global IT services market grew from $3,471.35 billion in 2021 to $3,938.75 billion in 2022 at a compound annual growth rate of 13.5%. The market is forecasted to reach $5,905.09 billion in 2026 at a CAGR of 10.7%. Financial services, retail and wholesale, manufacturing, and healthcare are some end-user markets for the Internet and Information Services industry.
One of the best information services stocks to invest in according to smart investors includes S&P Global Inc. (NYSE:SPGI), a provider of credit ratings, benchmarks, analytics, and workflow solutions in the global capital, commodity, and automotive markets. It operates in six divisions – S&P Global Ratings, S&P Dow Jones Indices, S&P Global Commodity Insights, S&P Global Market Intelligence, S&P Global Mobility, and S&P Global Engineering Solutions. Year-to-date as of October 27, the company has completed $11 billion of its $12 billion accelerated share repurchase program and expects to launch the remaining $1 billion of the ASR in December 2022.
On December 2, BMO Capital analyst Jeffrey Silber raised the price target on S&P Global Inc. (NYSE:SPGI) to $400 from $393 and maintained an Outperform rating on the shares. The analyst lifted his FY23 EPS view to $12.00 to $11.66 after its Investor Day presentation and S&P Global Inc. (NYSE:SPGI)’s numerous growth drivers, including higher use of technology, demand for risk solutions, and sustainability.
According to Insider Monkey’s third quarter database, S&P Global Inc. (NYSE:SPGI) was part of 90 hedge fund portfolios, compared to 84 in the prior quarter. Chris Hohn’s TCI Fund Management is the biggest position holder in the company, with 8.7 million shares worth $2.6 billion.
Baron Funds made the following comment about S&P Global Inc. (NYSE:SPGI) in its Q3 2022 investor letter:
“Shares of rating agency and data provider S&P Global Inc. (NYSE:SPGI) fell 9% during the third quarter due to continued weak debt issuance activity and headwinds to the Indices business from equity market declines. Credit markets were exceptionally soft during the quarter with non-financial corporate bond issuance down 36% for investment grade and down 84% for high yield, reflecting greater investor risk aversion, rising interest rates, and a drop-off in M&A activity. We believe this ratings weakness is temporary and diversification benefits from the acquisition of IHS Markit should support earnings growth next year. Over the long term, the company should continue benefiting from the secular trends of increasing bond issuance, growth in passive investing, and demand for data and analytics, while enjoying meaningful and durable competitive advantages that, in our view, are only strengthening following the merger with IHS Markit.”
9. Catalog/Specialty Distribution
Catalog/Specialty Distribution is one of the top sectors to look out for in 2023. One of the premier stocks in the industry is Amazon.com, Inc. (NASDAQ:AMZN), a technology conglomerate that engages in the retail sale of consumer products and subscriptions in North America and internationally. The company operates through three segments – North America, International, and Amazon Web Services. On November 30, Amazon Web Services announced that it will likely keep hiring in 2023 and construct new data centers despite a hiring freeze at the rest of the company.
On December 1, Cowen analyst John Blackledge raised the price target on Amazon.com, Inc. (NASDAQ:AMZN) to $160 from $150 and kept an Outperform rating on the shares. The analyst said he expects lower operating losses excluding AWS and Advertising in 2023 as cost headwinds normalize.
Among the hedge funds tracked by Insider Monkey, 269 funds reported owning stakes worth $34.6 billion in Amazon.com, Inc. (NASDAQ:AMZN) at the end of Q3 2022, compared to 252 funds in the prior quarter worth $30 billion. Ken Fisher’s Fisher Asset Management held the largest stake in the company, with approximately 50 million shares worth $5.6 billion.
L1 Capital International made the following comment about Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2022 investor letter:
“Quarterly results (mostly reported in late July and early August) were generally in line with our expectations. Solid company execution was subsequently swamped by increases in interest rates and hawkish Federal Reserve commentary. During the quarter, only one company (Amazon.com) made a positive contribution of more than 0.5% in Australian dollars. Amazon.com, Inc. (NASDAQ:AMZN) was the largest negative contributor in the June 2022 quarter, with the share price recovering modestly but it is still well below our view of fair value. No company detracted more than 0.5% from the Fund’s performance in Australian dollars, although the depreciation of the Australian dollar obfuscates some meaningful share price falls in U.S. dollars
We did not participate in the ‘unprofitable tech bubble’, but our portfolio does have significant exposure to some of the largest, highly profitable and incredibly financially strong technology companies which dominate their markets and have outstanding medium to long term growth prospects – including Alphabet, Amazon, Intuit and Microsoft. The share price of these companies has now fallen to levels we now consider to provide very attractive valuations for long term investors.”
8. Oil & Gas Production
The Oil & Gas Production industry reported all-time high profits in 2022, offering sufficient cash flow to finance their operations in 2023. While oil and gas companies understand the geopolitical and macroeconomic backdrop they will be faced with in the year ahead, they understand that the transition to cleaner energy in the long term is inevitable. OPEC expects global oil demand to rise in 2023 but at a slower pace than 2022. OPEC forecasts demand to increase by 2.7 million barrels per day (bpd), or 2.7%, in 2023.
According to smart investors, Exxon Mobil Corporation (NYSE:XOM) is one of the leading oil and gas stocks to consider for a balanced portfolio. Q3 2022 was the most lucrative quarter for Exxon Mobil Corporation (NYSE:XOM), as net income came in at $19.66 billion, revenues surged 52% year-over-year to $112.07 billion, and the company raised its quarterly dividend by 3.4% to $0.91 per share.
On November 22, Citi analyst Alastair Syme raised the price target on Exxon Mobil Corporation (NYSE:XOM) to $110 from $98 and reaffirmed a Neutral rating on the shares. The market rotation into energy equities has “further to run, even though names in our US coverage already sit at all-time highs,” the analyst told investors. History suggests that energy firms usually perform well in an earnings recession, which is Citi’s base-case for 2023, wrote the analyst.
According to Insider Monkey’s data, 75 hedge funds were bullish on Exxon Mobil Corporation (NYSE:XOM) at the end of September 2022, compared to 72 funds in the earlier quarter. Rajiv Jain’s GQG Partners is the biggest position holder in the company, with 33.8 million shares worth nearly $3 billion.
In its Q2 2022 investor letter, First Eagle Investments, an asset management firm, highlighted a few stocks and Exxon Mobil Corporation (NYSE:XOM) was one of them. Here is what the fund said:
“Integrated oil and gas giant Exxon Mobil Corporation (NYSE:XOM) performed well in the second quarter as continued high prices for energy products supported the stock. As the largest refiner in the US, the company has benefitted from wide “crack spreads,” or the margin between the cost of crude oil and the petroleum products extracted from it. Exxon continues to invest in refining capacity in the US, which industry wide has been in steady decline since 2019. We are pleased that Exxon has been using its strong cash flows to reduce debt and to return cash to shareholders through dividends and stock repurchases.”
7. Major Banks
As the global economy remains fragile heading into 2023, with high risk of stagflation or a mild recession, the effects will be felt across the banking industry as well. However, large, well-capitalized, and diversified banks should survive the market volatility relatively well. One of such banks is JPMorgan Chase & Co. (NYSE:JPM), which operates worldwide through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management segments.
On November 30, JPMorgan Chase & Co. (NYSE:JPM) announced that it is seeking to expand its retirement products in China, the world’s second largest economy, as China officially launched its private pension system last week.
Citi analyst Keith Horowitz on October 17 reiterated a Buy rating on JPMorgan Chase & Co. (NYSE:JPM) with a $135 price target following the company’s Q3 results. The analyst said the bank is “hitting on all cylinders” and that present share levels offer an “excellent entry point” for a “quality franchise.”
According to Insider Monkey’s data, JPMorgan Chase & Co. (NYSE:JPM) was part of 110 hedge fund portfolios at the end of Q3 2022, compared to 104 in the earlier quarter. Peter Rathjens, Bruce Clarke, and John Campbell’s Arrowstreet Capital held a prominent stake in the company, comprising 7.5 million shares worth $788 million.
Here is what Vltava Fund has to say about JPMorgan Chase & Co. (NYSE:JPM) in its Q3 2022 investor letter:
“We regard JPM to be the strongest and best- managed bank in the world. It is a leader in investment banking, commercial banking, credit cards, and asset management. Its size (the largest bank in the USA, with nearly USD 4,000 billion in assets) and diversification give it a strong competitive advantage that is compounded by its cost advantages and the high costs to clients associated with switching banks. JPM’s management prides itself on running the only large bank to avoid major instability over the long term.
JP Morgan’s quality and strength first became fully evident in 2008 under the leadership of its CEO Jamie Dimon. Not only did JP Morgan help to stabilize the market by taking over the failing Bear Stearns in the spring of that year, but throughout the Great Financial Crisis it was the only big US bank that did not require government assistance and it was highly profitable even in the difficult year of 2008.
A well-functioning and efficient bank can be a very good long-term investment, because the interest compounding effect works well here. JPM’s return on equity (ROE) is well into the double digits and this puts it in a good position to continue producing better long-term returns than does the market. JPM has been very profitable even during years when interest rates were close to zero. The current – and perhaps not temporary – return to somewhat more normal, higher interest rates should have a significantly positive impact on the bank’s interest income and overall profitability.”
6. Business Services
The global business support services market grew from $561.32 billion in 2021 to $621.03 billion in 2022 at a compound annual growth rate of 10.6%. The business support services market is expected to reach $835.66 billion in 2026, indicating a CAGR of 7.7%. Business-to-business, social, and business-to-consumer are the three main categories of business services. It is one of the best sectors to invest in heading into 2023.
Visa Inc. (NYSE:V), an American financial technology company offering transaction processing, clearing, and settlement of payment transactions, is one of the best business services stocks to monitor. On November 25, Visa Inc. (NYSE:V) reported that its U.S. payments volume in November increased 9% from a year ago, even after the company suspended its operations in Russia in March 2022, and the volume was up 10% in October 2022.
On December 2, Wells Fargo analyst Donald Fandetti raised the price target on Visa Inc. (NYSE:V) to $250 from $225 and maintained an Overweight rating on the shares. The analyst believes Visa Inc. (NYSE:V) is becoming even more involved in the global money movement ecosystem with its new products, making it harder to disintermediate them in any significant way, the analyst told investors. He thinks Visa Inc. (NYSE:V) can still deliver 20% EPS growth for the foreseeable future.
According to Insider Monkey’s Q3 data, 165 hedge funds were bullish on Visa Inc. (NYSE:V), compared to 166 funds in the last quarter. Terry Smith’s Fundsmith LLP is a prominent stakeholder of the company, with 5.6 million shares worth $1 billion.
In addition to AbbVie Inc. (NYSE:ABBV), NVIDIA Corporation (NASDAQ:NVDA), and ServiceNow, Inc. (NYSE:NOW), smart investors are piling into Visa Inc. (NYSE:V) heading into 2023.
Baron Funds made the following comment about Visa Inc. (NYSE:V) in its Q3 2022 investor letter:
“Shares of global payment network Visa Inc. (NYSE:V) fell despite reporting financial results that beat Street forecasts and sustained volume growth in recent months. Revenue grew 19% and EPS grew 33% in the most recent quarter, and double-digit payment volume growth persisted through August. Share price weakness represented a reversal of outperformance earlier this year and may be due to foreign exchange headwinds and concerns about a potential weakening of consumer spending. We continue to own the stock due to Visa’s long runway for growth and significant competitive advantages.”
Click to continue reading and see 5 Best Sectors To Invest In Heading Into 2023.
Suggested articles:
- Most Advanced Countries in Artificial Intelligence
- 10 Youngest Hedge Fund Billionaires
- 10 Best Performing Country ETFs in 2022
Disclosure: None. 11 Best Sectors To Invest In Heading Into 2023 is originally published on Insider Monkey.