The Takeaway
Technology stocks like Nvidia rode an AI wave in 2023, recovering from a brutal 2022. The technology sector has surpassed its 2021 market share and now represents its highest percentage of the Morningstar US Market Index since 2000. Investors holding a US market portfolio now have outsize exposure to a single sector relative to historical averages.
Defensiveness was out of favor in 2023, undermining sectors like healthcare, utilities, and consumer defensive, all of which held up relatively well in 2022.
When Morningstar equity analysts' price/fair value estimates are aggregated to the sector level, technology appears to be overvalued after its runup. The same goes for industrials and consumer cyclicals.
In 2023, equity market sector dynamics saw a return to the pre-2022 trend, in many ways. Technology is the prime example. After a deep decline in 2022, the Morningstar US Technology Index and the Morningstar Global Technology Index were the year's top performers in their respective universes, on the back of investor enthusiasm for artificial intelligence. Technology has now surpassed its 2021 share of the market, representing 29% of the Morningstar US Market Index–its highest level since early 2000. And this does not even include stocks like Alphabet and Meta Platforms, which were reclassified from technology to other sectors.
Meanwhile, 2023's laggards were some of the best-performing sectors of 2022. Energy, by far the highest-flying section of the equity market in 2022, came back to earth in 2023. The defensive sectors— utilities, healthcare, and consumer defensive—that held up relatively well in the down market of 2022 posted lackluster returns in 2023.
If the lesson of the past couple of years is that sector leadership is changeable, what does the future hold? A bottom-up, valuation-based approach can be employed, albeit as a long-term signal. Aggregating Morningstar Equity Research's company-level price/fair value estimates to the sector index level reveals risks and opportunities in the US market. Digging into company-level valuations is also useful, as overvalued sectors may still hold undervalued stocks, and vice versa.
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