The S&P 500's worst-performing sector in 2022 has led a rally in 2023 as investors bet on an early rebound in U.S. equities.

The S&P 500 communication services sector, which fell by more than 40.4% in 2022, has risen by about 9.6% so far in 2023, the best-performing sector in the large-cap index over the first three weeks of the year.

Consumer discretionary, which tumbled 37.6% and was the second-worst performing sector in 2022, has logged a similar rebound of 8.2% as investors bet that inflation has peaked along with the Federal Reserve's most aggressive rate-hike push in decades.

Overall, the S&P 500 rallied about 3.9% over the first three weeks of the year after declining more than 19.4% in 2022.

Lagging the broad market

The S&P 500, which lagged the communications services sector throughout much of 2021's bull market, overtook the sector in November 2021. Since then, communications sector stocks have underperformed the broader index.

Regaining ground

Nearly all of the communication services stocks that lost the most ground in 2022 have recorded sizable gains so far in 2023. Match Group Inc., which fell 68.6% in 2022, rallied 22.8% over the first three weeks of 2023. Similarly, Meta Platforms Inc., which fell 64.2% in 2022, has risen 11.7%, and Warner Bros. Discovery Inc., which fell 59.7%, has climbed nearly 36.5% so far in 2023.

Value disappears

While much of the communication services sector has experienced gains in 2023, the three-week rally has done little to remedy substantial market capitalization losses since the end of 2021. The sector's five largest companies have lost a combined $1.418 trillion in market cap since the end of 2021, according to S&P Global Market Intelligence data.

Alphabet Inc., for example, has lost $645.51 billion in market cap, down almost 33.6%, since the end of 2021. Meta has lost $570.19 billion, or 60.9% of its market cap, over that stretch.