It’s too soon to call October 13th the low for U.S. stocks. With the Federal Reserve steadfast in its view of higher rates for longer, equity valuations may not have yet reached the basement.

The good news is that the stock market has distanced itself from its 2022 bottom. And with some Fed speakers predicting a recession won’t happen, the economy’s best leading indicator may be foretelling.

Despite a February swoon, the S&P 500 will enter March 2023 like a lion with a respectable year-to-date gain. It’s a welcomed change from 2022, when the index was down 8% just two months into the year.

What’s more encouraging is where this year’s market leadership comes from. Cyclical sectors like technology, industrials and consumer discretionary companies that don’t typically outperform during economic downturns are leading the charge. 

To some, it’s irrational and driven by a rebirth of ‘buy the dip’ and other online investment platform mantras. To others, it makes perfect sense and is a byproduct of an undervalued market. 

Regardless of who is right, stocks are catching bids again. Most industry groups are in the green for the year, and some are bright green. If the S&P 500 continues to trend higher in 2023, these three industries could continue to lead the way. 

#1 - Auto Manufacturers

Automakers are this year’s best-performing group. Household budgets are strained, and car loan rates are high, so how could this be?  Thank the two P’s — production and prices.

Supply chains with long hampered output are becoming less disruptive. Chip shortages are gradually improving. In January 2023, ABB Chairman Peter Voser predicted the worst was over for the chip supply crunch. Around the same time, Toyota expects 2023 vehicle production to recover and top pre-pandemic levels. These comments suggest the supply part of the problem is all but fixed. But what about demand?

Automakers have quickly adjusted with inflation and auto loan rates taking their toll on car buying activity. The most prominent example is Tesla, which has aggressively slashed prices in the U.S. and overseas. Such action and government tax incentives could lead to stronger sales volumes that offset lower sticker prices. 

First-quarter earnings reports will tell us just how well automakers are doing in a more balanced yet tenuous supply-demand environment. Big year-to-date moves in Tesla (+70%), Stellantis (+25%), General Motors (+17%) and others have set the bar high.

#2 - Semiconductors

Semiconductors have been the tale of two industry giants. On the one hand, Intel is posting a steep fourth-quarter loss and slashing its dividend. On the other is Nvidia, delivering better-than-expected profits and a bright outlook. Which one accurately reflects the chip industry? Well, both.

Some parts of the semiconductor market are doing better than others. Personal computer (PC) sales are in a rut. According to Gartner, global PC shipment fell nearly 30% in the fourth quarter of 2022, with consumers deterred by affordability and having made a pandemic purchase. Video games are in a similar slump, although comments from Nvidia suggest a recovery is underway.

The demand for data center chips is strong at the opposite end of the spectrum. Enterprises are still moving ahead with cloud transitions despite looming recession risk because that’s where its customers are headed long-term. More recently, artificial intelligence (AI) technologies have been in hot demand due to the success of ChatGPT. 

This has created a bifurcated semiconductor industry of ‘haves’ and ‘have nots.’ Companies like Intel, with a heavy dependence on PCs are struggling. Others like Nvidia with exposure to AI, automobiles and a recovering gaming market, look to be in good shape. 

A look at the disparity in 2023 stock performances tells the story. On-trend companies like Nvidia (+61%) and STMicroelectronics (+36%) are up big. Those with less favorable market dynamics, like Intel (-5%) and Tower Semiconductor (-6%) lag. However, the group is one of this year's best performers.

#3 - Gambling

Record betting on this year’s Super Bowl has propelled gambling stocks to their highest level since April 2022. The American Gaming Association estimated that one in five Americans bet on Eagles-Chiefs. At its peak, FanDuel said it took in 50,000 bets per minute. 

These and other staggering figures show that people are willing to spend on sports wagering platforms even as economic conditions deteriorate. Combined with a growing number of U.S. states and international jurisdictions that have legalized gambling, this points to some super financial results ahead for industry players.

In anticipation of possible blowout first-quarter reports and favorable industry trends, investors have been placing their bets on gambling stocks. Among the biggest winners is DraftKings which is up more than 60% year-to-date. The company posted a narrower-than-expected fourth-quarter loss on 81% top-line growth. This caused the stock to gap up in almost five-times the average volume.

Last week, 10 Wall Street analysts reiterated their DraftKings ratings — seven buys and three holds. Their average price target of $25.30 means the stock could run another 34% over the next 12 months. A low volume pullback and emerging ‘golden cross’ on the daily chart suggests DraftKings is still worth the gamble.