Q3 2023 In Review and Q4 Market Outlook

Heading into the final months of 2023, the bullish sentiment that lifted stocks out of a bear market has faded. Investors can thank a fresh selloff in the market for that turn of events.

It transpired that some of the optimism that drove the first-half rally was misplaced, particularly expectations that the Federal Reserve would soon be pivoting to lowering rates.

Instead, “higher for longer” has become the newest catchphrase on Wall Street. That has the bond market flirting with its third straight down year, even as fixed-income markets are offering their highest yields in over 15 years. At the same time, the household names among growth stocks that helped usher in what many called a new bull market in the first half of the year ran out of steam.

As the fourth quarter gets underway, what’s the outlook for the stock and bond markets? What sectors are most attractive? What should investors do from here? We’ve gathered insights and perspectives from analysts and specialists about market performance, individual stocks, sectors, and mutual funds.

Q3 2023′s Market Performance and the Economy

Investors went into the third quarter increasingly confident that a recession was unlikely this year, thanks in large part to a continued healthy job market and consumer spending. For the stock and bond markets, the rub is that aggressive rate cuts penciled in for 2024 are now looking unlikely, even though signs continue to point to inflation pressures easing in the coming months.

This led to a retreat among the “Magnificent Seven” stocks that had provided the market with most of its gains. Instead value stocks outperformed, including dividend payers. Meanwhile, energy stocks were the best performers, thanks to a rise in oil prices.

Here is our dive into the big market and economic trends during the third quarter of 2023, as well as Morningstar’s outlook for the third quarter and beyond.

13 Charts On the Changing Market Mood In Q3

Both stocks and bonds fell as “higher for longer” became the mantra for interest rates.

The Wile E. Coyote Stock Market

Stocks are on less stable ground as “normalizing” rates alter the outlook.

Q4 Stock Market Outlook: Equities Undervalued After Retreat

The pullback provides a chance to readjust allocations and take advantage of new undervalued opportunities.

Q3 2023 Stock Performance and Sector Outlooks

Which stocks have done best since the start of the year? Which have taken the biggest beatings? Which sectors and stocks should long-term investors look to buy now? Here we take a closer look at how sectors and individual stocks did during the third quarter, along with their outlooks going forward.

Top-Performing Stocks for Q3 2023

Groupon, Tilray, U.S. Cellular, and energy stocks are among the leaders.

The Worst-Performing Stocks of Q3 2023

Farfetch, Chewy, and utilities are among the quarter’s biggest losing stocks.

Financial Services: Most Stocks Still Cheap in a Higher-for-Longer Interest-Rate Environment

We believe the market has overly penalized banks and that shares are undervalued.

Basic Materials: As Sector Underperforms, We See Strong Opportunities

Chemicals, metals and mining, and forest products offer windows for investors.

Communication Services: Media and Telecoms Down, but We See Better Times Ahead

Pockets of strength have emerged amid technical hurdles and streaming losses.

Consumer Cyclicals: Discretionary Spending Uncertainty Drives Attractive Valuations

Though consumers have been cautious, overall spending has been resilient despite the challenging backdrop.

Technology: A Top Sector With New Buying Opportunities

We remain confident in secular tailwinds like cloud computing, artificial intelligence, and rising semiconductor demand.

Utilities: Is the Worst Over?

While these stocks have cooled after years of high valuations, their fundamentals are better than they’ve been in decades.

Energy: Stocks Outperform, Helped by Tight Oil Market

With less than 15% of the sector undervalued, investors are clearly underwriting a higher-for-longer oil price scenario.

Real Estate: High Interest Leads to Negative Performance Despite Solid Growth

The median real estate stock trades at a better discount than those of most other North American sectors.

Healthcare: Valuations Look Attractive Across Most Industries

We view the sector as undervalued, as the market is not fully appreciating its innovations.

Consumer Defensive: Moaty Operators Should Win Amid Intensifying Competition

Despite trailing the broader market over the past year, the space isn’t flush with bargains.

Industrials: Like the U.S. Economy, the Sector Remains Resilient

The sector has benefitted from healing supply chains and favorable pricing, though the tight labor market is still challenging.

Q3 Mutual Fund Performance

For investors in mutual funds, the main story was the change in fortune for stock funds from the first half of the year. Growth-focused funds struggled while value funds were more buoyant in a down market for stocks. For bond funds, it was a mixed picture as interest rates rose, but funds invested in riskier fares gained.

Here’s Morningstar’s take on how stock and bond funds did during the third quarter.

Growth Funds Faced a Third Quarter Reversal of Fortune

Most laggards from the year’s first half became the leaders of the third quarter.

Another Losing Quarter for Many Bond Funds

Bond markets continued to reward investors who took credit risks.

How the Largest U.S. Stock Funds Did In Q3 2023

Thanks to a tilt toward value stocks, many of the largest active funds outperformed the biggest index funds.