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Stock market winners in 2023 are last year's losers

When it comes to market sectors, last year’s losers are this year’s winners.

The S&P 500’s best-performing sectors year-to-date are Technology (XLK), Communication Services (XLC), and Consumer Discretionary (XLY), up about 32%, 32%, and 22%, respectively. These three sectors were the worst performers of 2022 as the Federal Reserve hiked interest rates and investors worried about a looming recession.

Investors who stuck with last year's laggards have seen their luck change in 2023.

Even the badly beaten Homebuilders ETF (XHB) is up 24% year-to-date. The exchange-traded fund, which includes names like Lennar (LEN) and Toll Brothers (TOL), was down almost 29% in 2022 amid rising mortgage rates.

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In contrast, energy stocks, the superstars of 2022, have lost their luster this year with the Energy (XLE) sector down more than 6% this year after rising 64% a year ago.

"Energy is negatively correlated with tech as investors tend to use energy stocks as a source of funds to invest in tech," Jay Hatfield, CEO of Infrastructure Capital Management, told Yahoo Finance.

That trend has also been accentuated amid demand concerns for oil given China's weaker-than-expected recovery once COVID lockdowns were lifted.

Much of the tech-fueled rally this year comes amid expectations for a rate pause in the Fed's rate hikes, possibly as soon as this month. The recent frenzy over generative artificial intelligence has also been seen as a catalyst for the market's rally.

The banking crisis in March caused a steep sell-off in Financials and other cyclical sectors, pushing investors toward technology names as a safe haven.

"Large cap tech stocks were perceived as a safe haven during the banking crisis as most tech stocks have low debt or even net cash positions. Then the AI boom started as ChatGPT was released, fueling further rotation into tech stocks," Hatfield said.

The trend accelerated after chipmaker Nvidia (NVDA) posted a better-than-expected quarter and blockbuster guidance. The stock, which was down 48% last year, has gained 162% since the start of 2023.

Overall, the tech-heavy Nasdaq is up roughly 25% year-to-date while the S&P 500 has gained 11%.

Yet strategists point to the lack of breadth of 2023's rally as flashing a warning sign.

"We may be on the cusp of a new bull market here, but I think this bull market really deserves an asterisk until we see some broader participation. And right now, we're just not seeing it," Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, recently told Yahoo Finance Live.

Investors piling money into the AI trade have been feeding the concentration of market gains among a handful of companies.

Bank of America strategist Michael Hartnett calls these out-performers the 'Magnificent Seven' — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA), and Nvidia (NVDA).

As of last week, the 'Magnificent Seven' had accounted for 83% of the Nasdaq 100's $4 trillion growth in market valuation in 2023. Apple and Microsoft had each gained more in value than the entire bottom 93 stocks, Yahoo Finance's Jared Blikre recently noted.

Nvidia stock, which was down 48% last year, has come roaring back 162% since the start of 2023. REUTERS/Dado Ruvic/Illustration
Nvidia stock, which was down 48% last year, has come roaring back 162% since the start of 2023. REUTERS/Dado Ruvic/Illustration (Dado Ruvic / reuters)

“When you're counting on just a few stocks to drive performance, that, historically, has not ended well," Jim Tierney, AB chief investment officer of Concentrated US Growth, told Yahoo Finance Live.

"The market has to broaden out, or at some point, these 8 or 10 stocks just... run out of gas."

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

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