After the US equity market rode a wave of enthusiasm for artificial intelligence in 2023, 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 outsized exposure to a single sector relative to historical averages. This does not even include members of the so-called “Magnificent Seven” residing in other sectors, such as Alphabet and Meta Platforms.
According to a new report from Morningstar Indexes, 2023 equity market sector dynamics saw a return to the pre-2022 trend, in many ways. The Morningstar US Energy Index, the best performer of Morningstar’s eleven sector indexes in 2022, brought up the rear in 2023 as oil prices fell. Defensive sectors such as healthcare, utilities and consumer staples all found themselves out of favor in 2023 after a relatively strong 2022.
What does the future hold? History shows that sector leadership waxes and wanes. When Morningstar equity analysts' price/fair value estimates are aggregated to the sector level, technology appears to be overvalued after its runup. Communication services, real estate, energy, basic materials, utilities, healthcare, and financial services appear undervalued in aggregate. Within each sector, valuation dispersion exists.
Dan Lefkovitz – Strategist, Morningstar Indexes:
“The performance of equity sectors can vary dramatically. Short-term sector behavior is driven by a range of variables, some macro and some micro. Over the long term, however, valuation matters. Given the performance of technology stocks in 2023 and earlier, sector risk has increased for US equity investors.”
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