Tech down in ’22, up in ’23. What’s next?

TECHNOLOGY stocks had rotten performance in 2022, down about 28 percent. “I think many tech stocks are buys now, and will be screaming buys if they decline further,” I wrote a year ago.

Well, they didn’t decline further, but in hindsight they certainly were screaming buys.

In the 12 months through Feb. 29, tech stocks jumped 59 percent. If your portfolio was heavily in tech, you could take yourself out for a congratulatory dinner at the best restaurant in town.

Here’s a rundown on how each of the market’s 11 sectors performed in the past 12 months, and my best guess on what’s coming next.

King Tech

Investors are salivating about artificial intelligence, which has pushed the technology sector up more than 10 percent this year on top of last year’s big gain. The sector holds many innovative and successful companies, but the stocks are getting expensive.

Nvidia Corp. (NVDA) shares fetch 69 times recent earnings, Microsoft Corp. (MSFT) 37. The multiple on Advanced Micro Devices Inc. (AMD) is 389, and on Apple Inc. (AAPL) it’s 28.

For comparison, the average stock over the decades has usually sold for about 15 times earnings.

On balance, I would pencil the tech group in for a 15 percent gain over the coming 12 months. My guess for the overall market is an advance of 8 percent to 12 percent.

Communications

Communications stocks were right behind technology in the past 12 months, returning 58 percent (including dividends). This sector is dominated by Meta Platforms Inc. (META), formerly Facebook, and Alphabet Inc. (GOOGL), formerly Google.

Meta had a huge run in the past 12 months, returning 180 percent. It was cheap a year ago, but not now. It sells for 33 times earnings. Alphabet goes for a 24 multiple, up from 19 at the end of 2022. I would guess this sector will match the market over the next 12 months.

Consumer discretionary

Consumer discretionary stocks get the bronze medal for the past 12 months, with a 33 percent gain. This sector includes stocks such as Amazon.com Inc. (AMZN), Tesla Inc. (TSLA) and Home Depot Inc. (HD).

Consumers are ticked off because they are spending more for groceries and gas, as well as health-care and school tuition. Also, many people dislike both likely candidates in the coming Presidential election.

I don’t think that bodes well for this group in the coming months. I expect it to lag behind the overall market, although I think the homebuilding industry will do well.

Industrials

Industrial stocks returned 22 percent over the past 12 months. I like this group because I believe it still has some bargains in it. I’m particularly partial to defense stocks and agricultural stocks.

Health care

Health care stocks returned 16 percent in the 12 months through February, while the S&P 500 Total Return Index returned 30 percent. The health care sector usually holds up well in recessions and bear markets, but my guess is that we will avoid those headaches in 2024. Hence I expect health care to underperform again.

Financials

Financial stocks are unpopular. Rising interest rates are a mixed blessing for them. Banks do best when long-term rates are considerably higher than short-term rates. But at the moment the reverse is true. The financials managed a 15 percent gain in the past 12 months; I would expect more of the same.

Materials

The materials group contains chemicals, steel, gold and a few other basic materials. The group had a 9 percent return in the past 12 months. This group does best when inflation is rising, and I think (and hope) it will be falling this year.

Consumer staples

This group, which includes safe steady stocks such as Procter & Gamble Inc. (PG) and Colgate Palmolive Inc. (CL), eked out an 8 percent gain in the past 12 months. I feel that investors overpay for the presumptive steadiness, so the group doesn’t appeal to me much.

Energy

Energy was by far the best performing group in 2022, but gained a feeble 6 percent in the past 12 months, severely trailing the market. I like this group, as many energy stocks sell at modest multiples of earnings. Exxon Mobil Corp. (XOM) sells for 12 times earnings, Chevron Corp. (CVX) 13 times.

Real estate

Also up 6 percent in the past 12 months was the real estate group. With more people working from home, the office market is still in the doldrums. I would avoid this group unless you know of a special situation within it.

Utilities

The only group down in the past 12 months was the utility group. It lost 1 percent, even after taking dividends into account. To me, utilities are unappealing now. Many are bloated with debt, at a time when interest rates look to stay fairly high.