Q1 2023 in Review and Market Outlook

To judge from the final numbers for stock and bond market performance for the first quarter, it wasn’t such a bad outcome: Both markets closed the first three months of 2023 with single-digit gains.

But the path higher wasn’t smooth and the outlook from here remains uncertain as investors wrestled first with stubbornly high inflation and then with the unknowns of the crisis among regional banks.

As the second quarter gets underway, what’s the outlook for the stock and bond markets? What stock sectors are most attractive? What should investors do from here?

We’ve gathered insights and perspective from analysts and specialists about market performance, individual stocks, sectors, and mutual funds.

2022′s Market Performance and the Economy

The markets in the first quarter of 2023 were tossed back and forth, first by data showing inflation stuck at uncomfortably high levels and a red-hot job market, which led to expectations of still more Federal Reserve rate hikes. That story got turned on its head with the collapse of Silicon Valley Bank and concerns about a credit crunch as the first quarter head into its final days.

Here is both our look at the big market and economic trends from the first quarter of 2023 and Morningstar’s market outlook for the second quarter and beyond:

14 Charts on the Q1 2023 Whiplash Market Performance

Big swings in expectations around Fed policy dominated stock and bond market returns.

A Positive Q1 2023 for Stocks and Bond Markets, but the Coast Isn’t Clear

The key variable for investors to weigh will be the impact of the banking crisis on the economy.

Investors Look Past Turmoil and Drive Stocks Higher in Q1 2023

Even as the Fed looks to pause rate hikes, reasons for caution abound.

Q2 Stock Market Outlook: Undervalued, but a Rough Road Ahead

Monetary tightening is either at, or close to, an end, but market will be looking for increase in leading economic indicators to begin viable rally.

Q1 2023 Stock Performance and Sector Outlooks

Which stocks have been the best performers to start the year? Which have taken the biggest beating? Which sectors and stocks should long-term investors be looking to buy now?

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

Best-Performing Stocks of Q1 2023

Beaten-down tech stocks Nvidia, Meta Platforms, and Salesforce returned with vigor during the first quarter of 2023.

Worst-Performing Stocks of Q1 2023

Regional banks and REITs get pummeled; Bed Bath & Beyond and Groupon also take a hit.

Technology Stock Outlook: After Q1 2023 Bounce, We Still See Opportunities in Wide-Moat Software Stocks

We expect tech’s secular tailwinds including cloud computing and semiconductor demand to continue.

Utilities Stock Outlook: A Defensive Rotation Could Lift These Dividend-Paying Names

Undervalued Entergy, NiSource and Duke Energy are bright spots in this low-performing sector.

Financial Stock Outlook: Berkshire the Usual Stalwart

Blackstone, Citigroup also stand out within a more cautious banking landscape.

Healthcare Stock Outlook: Defensive Attributes Should Shore Up Stocks Amid Economic Headwinds

Biopharma and drug firms’ core fundamentals should stay solid if challenges persist.

Communication Services Stock Outlook: Financial Turmoil Has Brought Some Discipline to Sector

Disney, Comcast, and Alphabet still lead pack as borrowing costs have jump, but some firms poised for short-term gains even amid recent pain.

Real Estate Stock Outlook: AvalonBay Is High-Profile in This Undervalued Sector

Park Hotels and Ventas are recovering well from pandemic’s effects on occupancy levels.

Consumer Cyclical Stock Outlook: Investors Warm Up to Stocks, Propelling Market Outperformance, but Sector Still on Sale

Apparel and travel stand out as the most undervalued, although rising interest rates and persistent inflation threaten near-term profits.

Industrials Stock Outlook: Opportunities Still Available as Stocks Post Lackluster Start to 2023

Airlines in particular have benefitted from a rebound in services spending.

Consumer Defensive Stock Outlook: We Pluck Discounted Tyson Foods From the Flock

Albertsons and Kraft-Heinz are also names to put on your shopping list.

Energy Stock Outlook: With the Pullback of Commodity Prices, Buying Opportunities Have Started to Emerge in Energy

Russia and China remain concerns even as demand appears unchanged.

Basic Materials Stock Outlook: Sector Underperforms, Creating Opportunities Amid Decline

Companies that sell to less-cyclical end markets, such as food and beverage ingredients, should hold up fairly well.

Q1 Mutual Fund Performance

For mutual fund investors, the positive returns in the stock and bond markets during the first quarter offered some relief after the sea of red that was 2022′s performance. However, performance was uneven.

In the stock market, the rebound of battered tech stocks gave a lift to funds with stronger growth-stock tilts, while value funds and dividend strategies lagged.

Among bond funds, funds with heavier weightings of more interest-rate-sensitive bonds led returns as bond yields fell sharply. However, the catalyst for the drop in bond yields was the regional bank crisis, which spurred fears of a credit crunch that could hurt lower-quality bond issuers.

Stock Funds Off to Hot Start in 2023

A growth-led rally made up for some lost ground after 2022′s shellacking.

An Up and Down First Quarter Across All Morningstar Fixed-Income Categories

By the end, investors sought refuge in high-quality assets amid heightened market uncertainty.

How the Largest Stock Funds Did in the First Quarter

Fidelity Contrafund, Invesco QQQ lead the pack, while Vanguard Value Index lags.

For Bond-Fund Investors, Credit Risk Suddenly Matters

The banking crisis has pushed the quality of funds’ bond holdings into the spotlight.