Q3 Markets and Funds in Review and Q4 Stock Market Outlook

Investors hoping for some relief after a brutal first half of the year appeared to be getting their wish in July, but by the end of the third quarter, the performance of the stock and bond markets had taken a turn decidedly for the worse.

Whether it’s stocks or bonds, investors are sitting on meaningful losses for the year. What’s been driving markets lower? What should investors do from here?

We’ve gathered insights and perspective from our analysts and specialists about market performance, individual stocks, and funds. We examine what brought us here and what investors should be thinking about when it comes to where the markets might be headed next.

Markets & The Economy

Why have stocks been going down? To a large degree, it’s the same story as the first half of the year: stubbornly high inflation, aggressive Federal Reserve interest-rate increases, and a growing fear of recession.

For bond investors, the series of unprecedented rate hikes engineered by the Fed in its effort to tamp down inflation have been the catalyst for some of the worst bond fund losses on record. Here’s a closer look:

What’s Next for the Stock Market? | High inflation and weak economic growth will weigh on near-term earnings growth and fuel volatility, but we think stocks are well into undervalued territory.

Q3 Market Performance in Charts | Bonds again offer no safe harbor as stocks make a round trip in the bear market.

3 Lessons for Investors from the Third Quarter | Why you shouldn’t fight the Fed, expect a V-shaped bounce, or throw in the towel.

Where to Invest Your Money in Q4 2022 | After a tough quarter, here’s where the best opportunities lie for long-term investors.

Mutual Funds Performance

When the quarter ended, it left investors in both stock and bond funds in the red. But for stock investors, the losses were at least less severe than previous quarters. U.S. stock funds finished the quarter down about 3% on average, with growth stock funds faring better than value funds.

U.S. bond mutual funds and exchange-traded funds, however, posted sharper declines. The average intermediate core bond fund—a common foundational holding in portfolios—fell more than 4%. Government bonds took the largest losses, with the average long government bond fund seeing a 9% decline.

Here’s a closer look at how fund investors fared in the third quarter:

How the Largest Stock Funds Did in Q3 | Funds clock their third-consecutive negative quarter.

How the Largest Bond Funds Did in Q3 | Some funds saw a fourth consecutive quarter of losses.

U.S. and International-Equity Funds Continue Their Slide | Growth funds hold up better than their value counterparts, but year-to-date performance is still ugly.

Surging U.S. Interest Rates Squashed Bond Fund Returns Again | Most fixed-income funds post third-consecutive period of losses in the third quarter.

Stock Performance and Outlook

With sentiment swinging widely based on the Fed, stock investors faced a treacherous market during the third quarter. But one group in particular had a strong run: solar energy stocks.

More broadly, consumer cyclical stocks and traditional energy names managed to avoid the downturn. Meanwhile, communication services and real estate stocks were hit hard. Among the stocks facing the worst losses were several healthcare and technology names, which saw their valuations nearly cut in half.

Here, we take a deeper dive into third-quarter market performance among sectors and individual stocks, along with the fourth-quarter outlook from Morningstar’s stock analysts:

The Best- and Worst-Performing Stocks of Q3 | Solar stocks shine, and retail remains buoyant. Chinese tech names and European healthcare get battered.

33 Undervalued Stocks for Q4 | Here’s the new list of Morningstar’s top analyst picks for the fourth quarter.

7 Charts on Value vs. Growth Stocks in the Third Quarter | Growth stocks were down in the quarter yet still managed to outperform value stocks.

Sector Outlooks:

Amid Poor Performance for Tech Stocks, Selloff Is Overdone in Software | Despite macro headwinds, we remain optimistic about long-term trends for cloud computing and rising semiconductor demand.

In Communication Services, Negative Messages Abound | Amid heavy pessimism in the sector, our top picks are Disney and Comcast.

Utilities Brighten Under Cloud of Recession, but Future Dim at Lofty Valuations | Renewable energy continues to be a long-term boon for the sector.

Energy Sector Losing Steam as Prices Retreat | Schlumberger, ExxonMobil and Equitrans are top picks as the sector looks less attractively valued than others.

Real Estate Sector Declines As Rising Interest Rates Hit Home | The decline comes despite growth in fundamentals.

Consumer Cyclical Still Offers Compelling Opportunities | Travel volume remains resilient and Gap and Bath & Body Works among top retail picks.

In Consumer Defensive Sector, Alcoholic Beverages Bear Most of the Buzz | Overblown supply chain fears may be spooking wary investors, even as Beyond Meat and Boston Beer look attractive.

Healthcare’s Defensive Nature Helps Against Macro Challenges | And the new U.S. drug policy looks manageable.

Basic Materials Sector Underperforms; We See Long-Term Opportunities Amid Broader Market Decline | More than 54% of the stocks are trading in either 5- or 4-star territory.

Financials May Have Near-Term Pressure on Fee Revenue, but We Believe They Are Undervalued | Sector’s stocks are undervalued despite likely softening economy.

Industrial Sector Contains Opportunities Amid Economic Headwinds | Aerospace, defense, and waste management have led the Morningstar US Industrials Index’s outperformance.