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Q3 2023 In Review and Q4 Market Forecast

The positive enthusiasm that brought equities out of a bear market has waned as we enter the last months of 2023. Some of the confidence that propelled the first-half rise proved to be unfounded, particularly hopes that the Federal Reserve would soon begin to decrease interest rates. Instead, higher for longer has become the newest Wall Street slogan.

As a result, the bond market is on the verge of its third consecutive year of decline, despite fixed-income markets giving the highest rates in over 15 years.

At the same time, the growth stock household names that helped usher in what many considered a new bull market in the first half of the year peaked.

What is the outlook for the stock and bond markets as the fourth quarter begins? Which industries are the most appealing?What should investors do next? We’ve gathered thoughts and perspectives on market performance, individual stocks, sectors, and mutual funds from analysts and specialists.

Market Performance and the Economy in Q3 2023 Investors entered the third quarter increasingly confident that a recession would be avoided this year, owing in large part to the ongoing strength of the labor market and consumer spending.

The rub for the stock and bond markets is that dramatic rate cuts scheduled for 2024 are now appearing implausible, despite signals that inflation pressures will ease in the coming months.

Here’s a look at the major market and economic developments in the third quarter of 2023, as well as the forecast for the fourth quarter.

The Wile E. Coyote Stock Market

Stocks are on shakier ground as “normalizing” interest rates shift the outlook.

Q4 Stock Market Outlook: Equities Undervalued Following Recession

The decline provides an opportunity to rebalance portfolios and capitalize on new discounted prospects.

Top-Performing Stocks in the Third Quarter of 2023

Among the toppers are Groupon, Tilray, US Cellular, and energy stocks.

The Stocks That Underperformed in the Third Quarter of 2023

Farfetch, Chewy, and utilities are among the worst-performing stocks this quarter.


Financial Services

In a context of higher-for-longer interest rates, most equities remain inexpensive. Banks have been overly penalized by the market, and their shares are undervalued.

Basic Materials

As the basic materials sector underperforms, we see significant opportunities. Chemicals, metals and mining, and forest products all provide opportunities for investors.

Communication Services

Media and telecommunications are down, but we expect better times ahead. Despite technological difficulties and streaming losses, pockets of strength have arisen.

Consumer Cyclicals: Uncertainty in Discretionary Spending Drives Attractive Valuations

Despite the tough environment, despite consumer caution, aggregate spending has been resilient.

Industrials: The Sector Remains Resilient, Much Like the US Economy

The sector has benefitted from healing supply chains and favorable pricing, though the tight labor market is still challenging.

Q3 Mutual Fund Performance

The key story for mutual fund investors was the shift in fortunes for stock funds since the first half of the year. In a stock market downturn, growth funds failed while value funds thrived. Bond funds saw mixed results as interest rates rose, but funds invested in riskier assets profited.

Growth funds experienced a third-quarter loss.

The majority of the year’s first-half laggards turned third-quarter leaders.

Another bad quarter for bond funds

Bond markets continued to reward credit-risk-taking investors.

How the Biggest US Stock Funds Fared in the Third Quarter of 2023

Many of the largest active funds outperformed the largest index funds due to a lean toward value equities.

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