Published by Future Star Securities – May 2023
Throughout 2023, U.S. equity markets have undergone a clear and measurable rotation, shaped primarily by the Federal Reserve’s ongoing rate hike cycle. With inflation remaining stubbornly above the 2% target and the Federal Funds Rate now exceeding 5.25%, investors have begun to pivot away from high-duration growth stocks—particularly in the technology sector—toward value-oriented plays in financials, industrials, and energy.
The S&P 500 Growth Index is up just 3.2% year-to-date, while the Value Index has gained over 11%, signaling a preference for companies with tangible earnings and stronger sensitivity to interest rate dynamics. Notably, bank stocks, defense contractors, logistics firms, and infrastructure-related equities have significantly outperformed their high-tech counterparts.
“Investors are recalibrating expectations. When rates rise, future cash flows are worth less—especially for companies that don’t generate strong profits today,” explained Sarah Long, macro strategist at Future Star Securities. “This is a classic environment for sector rotation, and we expect it to persist well into the second half of the year.”
Financials have emerged as key beneficiaries of the macro backdrop. Higher rates have boosted net interest margins for commercial banks, while insurance companies and asset managers have seen improvements in underwriting and fee-based revenues. Meanwhile, the industrial sector—supported by federal infrastructure spending and manufacturing reshoring trends—has shown strong earnings momentum despite global supply constraints.
Future Star’s internal portfolio data reveal a 38% increase in retail investor allocations to financial ETFs over the past six months. In contrast, technology sector inflows have plateaued, with many investors opting for defensive rotation strategies such as covered call funds and dividend-weighted ETFs.
“It’s not that tech is no longer relevant—it’s that valuations have to reflect macroeconomic gravity,” said Long. “The market is telling us that capital-intensive, earnings-stable sectors are better positioned for this phase of the cycle.”
Importantly, this rotation is not purely defensive. Select industrial names with exposure to clean energy, aerospace, and logistics automation have attracted strong institutional interest. Similarly, energy stocks have offered both income and inflation protection, with WTI crude stabilizing around $80 and dividend yields in the sector averaging over 4.5%.
For investors, Future Star recommends a balanced sector exposure strategy: underweight unprofitable tech, overweight financials and industrials, and maintain a tactical allocation to energy and infrastructure.
Conclusion:
2023 has marked a pivotal shift in equity market leadership. As the Fed maintains a hawkish stance, sector rotation is not a trend—it’s the strategy. Future Star Securities encourages investors to adapt portfolios accordingly, aligning asset allocation with a rising-rate, real-return-focused environment.