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Market Update

Are These Stocks the New Market Leaders?

Cash-generating stocks including healthcare and financials, rather than Big Tech, could be the favorites when the bear market ends. 

Big bear markets in stocks usually do more than just send stock prices lower. They also lead to a change in the market’s leadership.

In other words, investors looking to best position themselves for an eventual rebound in stocks shouldn’t be looking in the rearview mirror for the market’s next round of winners.

In the case of today’s bear market, that likely means looking elsewhere besides the kind of technology-focused stocks with high-growth expectations that were investor darlings in recent years.

In fact, recent weeks have already been showing hints of a change of leadership. With the exception of the big post-inflation report rally, so-called Big Tech stocks have been continuing to post losses and warning of tough earnings ahead.

Instead, winners have tended to be slower-growth, cash-generating companies, such as financials and healthcare companies.

Among the stocks that have been performing well in recent weeks, and could represent what investors should look for in new leadership going forward:

  • Chevron (CVX)
  • JPMorgan Chase (JPM)
  • Merck (MRK)
  • UnitedHealth Group (UNH)
  • Visa (V)

“It’s very clear that we have a rotation in leadership going on in the markets,” says Anastasia Amoroso, chief investment strategist at iCapital. “The tech stocks that led the past decade have now become laggards.”

This may be a hard bias for investors to break, given how long tech stocks have been big winners. “But investors can’t be complacent,” she says. “When circumstances change, you have to change your view.”

Line chart showing the 10-year performance history of technology stocks vs. the US market.

Tech’s Big Winning Streak

Coming into this year, stocks within technology and communication services—a sector that includes names like Google parent company Alphabet (GOOGL) and Facebook parent company Meta Platforms (META)—were reliable top performers.

While other sectors would slip into the lead—such as the huge gains in energy stocks in 2021 on the back of the bounce in oil prices—it was tech stocks, with their huge market capitalizations, that were responsible for significant portions of the market’s gains.

Through the end of 2021, the top performing sector for the previous five years was technology, which rose an average of 31.6% during that time. That compared with a five-year average return on the Morningstar US Market Index of 18.2% per year and 17.6% on healthcare stocks, the second-best performing sector.

This was highlighted in 2021, where the 25.8% return on the Morningstar US Market Index was led by Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Alphabet, and Tesla (TSLA). And of these stocks, the smallest gain was the 34.5% rise in Apple, while Nvidia surged 125.4%.

Performance of each equity sector in 2021 vs. 2022.

This year, of course, that trend has been turned on its head. Through Nov. 8, Nvidia is down 50.3%, Tesla is down 45.7%, Alphabet fell 38.6%, and Microsoft is off 31.5%. Only Apple was in line with the broader market losing 20.9% in 2022.

Changing Leadership

While the bear market sell off has dominated returns this year, the question for investors from here is what kinds of stocks will take the lead next.

Of course, it’s still unknown how long the bear market will last and what the economic landscape will be whenever a new bull market begins. That will play a big role in determining the characteristics of market leadership.

Many observers say that investors should expect a different economic backdrop than the one we’ve had in recent decades. That means an end to low inflation, low interest rates, and long periods of economic growth.

That doesn’t mean that rates will stay as high as they currently are, and inflation is expected to decline, but on both fronts a return to previous levels seems unlikely.

Against this backdrop, some hints of what new leadership could look like may be visible in the stock market’s most recent bounce from lows hit on Sept. 30.

With the exception of the big growth-stock rally that followed the better-than-expected October Consumer Price Index report, the winners in the market reflect a change in leadership from even the summer bounce, which was led by technology and other stocks.

Since the end of September, the market’s gains were paced by value stocks from the financial services, industrials, energy, and healthcare sectors.

Multinational investment bank and financial services firms JPMorgan Chase (JPM)—up 26.9% this quarter through Nov. 8—and Bank of America (BAC), up 22.9%, were both key contributors to the Morningstar US Market Index’s gain of 6.8%.

Energy giants Exxon (XOM) and ConocoPhillips (COP) have each gained about 30% for the quarter.

Companies that have led the Morningstar US Market Index since September 2022

At the same time, technology and communication services stocks have been the market laggards this quarter. Amazon, Tesla, Meta Platforms, Alphabet, and Microsoft dragged the market down.

“Investors want sectors and companies that earn a lot of cash right here right now,” says José Torres, senior economist at Interactive Brokers. ``They don’t want to buy tech companies that have a 100 p/e ratio where theoretically they’d have to wait 100 years to get their money back.”


Companies that dragged down the Morningstar US Market index the most since September 2022.

What Stocks Will Lead the Next Bull Market?

iCapital’s Amoroso says that when the market does recover, the kind of technology stocks that led the market likely won’t be the leaders of the next decade. “The robust results we’ve seen from Big Tech are probably not repeatable in the next several quarters or years.”

In part, that’s because large-cap technology stocks have already experienced a “secular pull-forward” in demand, Amoroso says. She points to the mega-trends of the past decade including the acceleration of e-commerce and the widespread adoption of social media, streaming, and cloud computing.

As these trends have already reached a high level of market penetration, she says, “tech has borrowed from future years, in a way.” Amoroso expects earnings growth to be slower for these companies compared to what investors have been seeing.

Even so, she says, the secular trend of digitization will still be here. “I think we will have a new class of leaders emerge,” says Amoroso. “Some of them may very well be tech companies, but they will be a different class of tech companies,” she says.

“We’re seeing this shift in secular leadership where big-cap tech investors are now looking for other areas of growth: Clean energy has been sliding under the radar all year, probably one of the biggest opportunities we have for growth in the coming decade,” she says.

Other areas include healthcare innovation and cybersecurity. “Look to companies within these areas that have a pathway to profitability.”

Favor Cash-Generating, Value Stocks

Interactive Brokers’ Torres thinks it’s unlikely that technology stocks of any kind will lead the market in the coming years. “If you think we’re going back to zero-percent interest rates and abundant liquidity, then of course, tech stocks will lead. But I think interest rates will stay higher for longer.”

In a higher interest rate environment, he says, cash-generating stocks will do best. Broadly, he believes that value stocks will be the next leaders, especially the healthcare sector and pockets of financial services.

For now, he says, “even in value areas that may be looking attractive from a valuation basis at the moment, when we do have a recession, revenues are going to get hit.” Torres believes that if and when a slowdown comes, every stock sector has room to fall. “But,” he says, “those that have lower valuations have a lot less room to fall.”