Q2 2023 in Review and Market Outlook

Halfway through 2023, it’s looking like the bear market for stocks may be over. But with the Federal Reserve still warning of interest rate increases to come, it’s unclear whether the coast is really clear.

That uncertainty hasn’t stopped a big rally in mega-cap stocks such as Apple AAPL, Meta Platforms META, and Nvidia NVDA, along with a group of names that investors are betting will benefit from the artificial intelligence frenzy.

It was a mixed quarter for bond investors as investors came to terms with the idea that rates aren’t coming down any time soon. But higher yields resulting from the Fed’s rate hikes also mean fixed-income investments are potentially more attractive than they’ve been in years, even if the Fed’s not yet done with its inflation fight.

As the third 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 perspectives from analysts and specialists about market performance, individual stocks, sectors, and mutual funds.

Q2 2023 Market Performance and the Economy

Investors went into the second quarter on high alert for a recession and thinking the Fed could soon be cutting rates. At the quarter’s end, there was still no economic downturn in sight, inflation remained sticky, and the Fed was expected to keep rates higher for longer.

There were significant divergences in performance in the markets. Within stocks, the “Magnificent Seven” were responsible for the bulk of the rally, while the rest of the market was flat on balance. In the bond market, changing expectations for Fed policy sent rate-sensitive bonds slightly lower.

Here is our dive into the big market and economic trends from the second quarter of 2023, along with Morningstar’s market outlook for the second quarter and beyond:

Third Quarter 2023 Stock Market Outlook: Time to Batten Down the Hatches or Raise the Sail?

Investors should take profits on overextended stocks and reinvest in undervalued names left behind by the rally.

14 Charts On New Bull Market for Stocks, Mixed Returns for Bonds in Q2

A look back at the market’s second-quarter performance as investors wrestled with a changing outlook for the Fed.

When Will the Fed Start Cutting Interest Rates?

Our latest economic forecast for interest rates, inflation, and GDP growth.

Q2 2023 Stock Performance and Sector Outlooks

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

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

Best-Performing Stocks of Q2 2023

Wayfair, Palantir, and Nvidia stocks were among the biggest gainers during the second quarter.

33 Undervalued Stocks

Here’s the new list of Morningstar’s top underpriced analyst picks for third-quarter 2023.

Worst-Performing Stocks of Q2 2023

EVgo, Advance Auto Parts, and Dish Network were among the biggest decliners during the second quarter.

Communication Services Stock Outlook: As Meta and Alphabet Soar, Traditional Telecom Comes Under Renewed Pressure

While pessimism weighs on telecom valuations, wireless carriers str poised to reap the benefits of recent price increases

Technology Stock Outlook: After Taking Hits in 2022, Tech Hits Some New Highs in 2023

We see fewer buying opportunities even as the sector is now an outperformer to the broader market.

Real Estate Stock Outlook: Sector Continues to Underperform Despite High Same-Store NOI Growth

Park Hotels & Resorts and Ventas are among our top picks.

Energy Stock Outlook: Stocks Losing Steam as Commodity Doldrums Weigh on Sector

Global oil prices are down even as natural gas prices also weather a tough spell.

Financial Services Stock Outlook: The Financial Sector Is Undervalued, but There Are Clouds On the Horizon

Expectations for interest rates have risen, and charge-offs could climb above pre-pandemic levels.

Consumer Cyclical Stock Outlook: Despite Macro Headwinds and Near-Term Uncertainties, There Are Ample Opportunities to Invest

We expect strong travel demand to persist, and restaurant sales have held up remarkably well.

Healthcare Stock Outlook: Innovative Products and Defensive Nature Should Support Solid Results in Uncertain Times

We see plenty of opportunities in healthcare, especially in biopharma, healthcare providers, healthcare plans, and diagnostics and research.

Utilities Stock Outlook: Still Running In Place

The sector has remained flat due in large part to a long-overdue valuation correction.

Consumer Defensive Stock Outlook: Competitively Advantaged Firms Positioned to Withstand Promotional Resurge and Evolving Consumer Behavior

We see opportunities in consumer-packaged goods and the alcoholic beverages space.

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

Our top picks include Albemarle and Dow.

Industrials Stock Outlook: Fewer Stocks Are Undervalued, but Investment Opportunities Still Exist

Easing supply chains and a more constructive outlook on the global economy have benefited the industrial distribution and industrial products businesses.

Q2 Mutual Fund Performance

For mutual fund investors, the positive returns in the stock market during the second quarter built on the momentum gained during the first three months of the year. As was the case at the start of 2023, growth funds have been leading the pack while value has returned to lagging.

For bond funds, it was a mixed picture, as interest rates rose but funds invested in riskier fare gained.

Here’s Morningstar’s take on stock and bond fund performance during the second quarter:

Bond Funds Post Mixed Results in 2023′s Second Quarter

Lingering bond market volatility in the second quarter rewarded investors who took risk.

How the Largest U.S. Equity Funds Performed in Q2

Fidelity Contrafund, Dodge & Cox Stock, and Invesco QQQ lead; Vanguard Value, American Funds Washington Mutual lag.

Growth Stock Funds Fly High but Fall Short In 2023′s First Half

Most stock-pickers missed the market’s best-performing sectors and stocks.

How the Largest Bond Funds Performed In Q2

These funds from Vanguard, iShares, and American Funds lagged as rates rose.