The 7 Best Market Sectors for Q4

Stocks to buy

For many investors, 2023 can’t come soon enough. The S&P 500 is down 16.93% for the year and the Nasdaq is down over 25%. It has been an equal opportunity selloff. So unless you were in one of the best market sectors, it’s likely your portfolio is in the red.

But there’s still one more quarter left in 2022. The good news is that stock markets tend to perform well in the 12 months after a midterm election. But we have to get there first. And an equally reliable indicator is that equities tend to underperform in the run-up to the midterms.

Rather than avoid the market, however, there’s still money to be made if you’re in the right sectors. Right now, that means looking at some of the same sectors that have been the best-performing in the first three quarters.

Here are seven of the best market sectors for Q4, and stock picks for each one.

Best Market Sectors: Transportation

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In 2021, the transportation sector was under scrutiny as global supply chains were snarled. Goods still need to move from point A to point B and that means this sector still remains one of interest as we head into the fourth quarter. Whether by land, air or sea, investors have no shortage of companies to choose from.

One company that I want to put on investors’ radars is Scorpio Tankers (NYSE:STNG). The company operates a fleet of tankers that move petroleum products across the globe. It is taking advantage of rising revenue in 2022 to cut its debt. STNG stock is up 249% for the year and is trading above its consensus estimate. However, with revenue expected to remain at nearly four times traditional levels, it may only be a matter of time for those price targets to rise.

Consumer Staples

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This is also known as the “consumer defensive” sector, and if you look inside the numbers at the August CPI report, you’ll understand my thesis for including it.

It’s clear that consumers are tapering their spending on discretionary purchases, including travel. The money that’s not being spent there, however, is not going into their savings accounts. Instead it’s going to pay for groceries, fuel and other staple items.

That’s an important distinction because this sector also includes the retail sector, which continues to have a cloudy outlook for the holidays. However, food and beverage stocks such as Costco (NASDAQ:COST) and PepsiCo (NASDAQ:PEP) should do well and pay a dividend for good measure. And investors willing to look at the “sin stocks” would do well to consider Philip Morris (NYSE:PM). Sin stocks, such as tobacco companies, tend to outperform the market when the economy is slowing down.

Best Market Sectors: Energy

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The energy sector was one of the best market sectors in the first half of the year. That was largely due to traditional oil and gas companies benefiting from higher prices at the pump. In the fourth quarter of the year, some of these stocks still have room to run. That’s why stocks like Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) should remain on your radar.

But investors should also be looking at clean energy stocks. Enphase Energy (NASDAQ:ENPH) remains one of my favorites in this sector. The company’s products and services have a large addressable market and help build on the transition to solar energy. Another quality clean energy stock to consider is NextEra Energy (NYSE:NEE) which as Josh Enomoto recently wrote, deserves your attention based on its sheer scale.

Pharmaceutical

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The pharmaceutical sector can be one of the best market sectors because companies are developing drugs and therapeutics that can improve the quality of life. However, as the Covid-19 pandemic proved, many of these companies also are developing products that can be the difference between life and death.

For conservative investors, there’s likely to be a vaccine halo on Pfizer (NYSE:PFE) for some time. But if you’re looking for other alternatives, you should consider a company like AbbVie (NYSE:ABBV), which has delivered two drugs to market to help offset the declining revenue from Humira, which is losing its patent protection.

Another strong contender is Amgen (NASDAQ:AMGN), which also has two significant products in the market along. It also has a deep pipeline of candidates that have the potential to add revenue in coming years.

Best Market Sectors: Technology

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Technology stocks have been hit hard in 2022 as investors seek to take profits from a sector that outperformed the S&P 500 by over 380% over the last 10 years. But it’s still one of the best market sectors for a number of reasons.

One of those is the continued focus on cybersecurity. Companies may be cutting back on some discretionary spending. And they may also be reducing headcount. So far, however, they appear to be reluctant to cut back on spending on the tools they need to keep cyberattacks away.

That puts cybersecurity stocks in focus, and a couple to look at include CrowdStrike (NASDAQ:CRWD), which is the largest cybersecurity company in terms of market cap, and Palo Alto Networks (NYSE:PANW). For mid-cap investors, Zscaler (NASDAQ:ZS) is an appealing choice as a niche play as is Sentinel One (NYSE:S).

Utilities

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Much like consumer staples, utility stocks will be among the best market sectors because consumers will always need electric, gas and water. The rates utility companies charge are highly regulated. But that means investors can count on consistent revenue and earnings. Additionally, these companies typically pay dividends that have some of the best yields.

For the remainder of 2022, one of the best utility stocks to buy is American Water Works (NYSE:AWK). The company expects to increase its earnings per share at a compound annual growth rate (CAGR) of 7% to 9% for the next five years.

Another quality candidate is Brookfield Infrastructure Partners (NYSE:BIP) which acts as an exchange-traded fund of sorts for investors. The company invests in a number of utilities and related businesses which gives it reliable cash flow. Brookfield is forecasting annual dividend growth of 5% to 9% which would expand on a dividend that is already significant at 3.6%.

Best Market Sectors: Healthcare

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The broad healthcare sector has outperformed the S&P 500 over the last 10 years. And like the technology sector, it is multi-faceted. At different times some subsectors are better than others. For example, during the Covid-19 pandemic, telehealth had a moment to shine and that raised the profile of companies such as Teladoc Health (NYSE:TDOC).

By contrast, medical technology stocks were hit hard due to falling demand. The recovery has been uneven, but it is ongoing and that will bode well for stocks that fall into the medical subsector including Medtronic (NYSE:MDT).

However, this is a sector that can appeal to fans of mid-cap stocks with companies such as Lantheus Holdings (NASDAQ:LNTH), a diagnostic medical-imaging company and small-cap stocks such as that of TransMedics Group (NASDAQ:TMDX), a company that specializes in the development and commercialization of preserving human organs for transplantation. The company has a key system that is approved by the U.S. Food and Drug Administration for transporting multiple organs.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.

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