The S&P 500 hits a record high, capping a strong quarter

The stock market surged higher in the fourth quarter of 2023 as evidence accumulated that the economy has not slipped into recession territory, despite the Federal Reserve's campaign to raise interest rates. At the same time, analysts point to an AI craze on Wall Street that rivals the dot-com boom of the late 1990s, when investors sought to capitalize on the transformative gains brought by the early Internet.

The S&P 500's boom is a welcome sign for millions of Americans who invest in the index through retirement accounts. Investors in 2022 had about $5.7 trillion in assets negatively correlated to the S&P 500 and another $5.7 trillion from funds that use it as a benchmark, according to S&P Global.

Voters' feelings about the stock market and the economy could influence the 2024 election, as both President Biden and his presumptive rival Donald Trump will have to defend their economic records. Trump predicted that the market would collapse if he did not win. Biden has already faced attacks from the right over inflation and gas prices, while his office has said it is under control and has pointed to a strong labor market.

Economic sentiment is finally improving, and consumer sentiment is rising

Technology companies led the way, including a few names heavily associated with the AI ​​business S&P 500 gains. Seven of the largest technology stocks known as the “Big Seven” — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — are up 75 percent on average in 2023 and represent 30 percent of the index’s total market cap at the end of 2023. ..

“AI is the new dot-com,” said Michael Farr of Farr, Miller & Washington. “It's the new magic that will change the world that we don't yet understand. But we all know that it's very powerful.”

These seven stocks accounted for about half of the S&P 500's growth last year. Nvidia, whose high-performance chips have become popular in artificial intelligence uses, had the group's best year, at one point gaining nearly $190 billion in value overnight, a 24 percent increase.

Stock market rises through 2024, shrugging off recession fears

The rising values ​​for Big Tech stocks came on the heels of a down year for the industry in 2022. In 2024, investors can expect the sector to be “good, but not great,” said Ross Mayfield, investment strategist at Baird & Co.

“There was concern about the rally earlier in the year because it was so narrow, not based on strong fundamentals but AI enthusiasm,” Mayfield said. “That has been put into place in the last couple of months. You're really starting to see leadership emerge from the more cyclical, economically linked stocks and the market has expanded.

Other stock indexes were also higher, with the Dow Jones Industrial Average and the tech-heavy Nasdaq Composite hitting their own records in early December.

Although the rest of the market has lagged behind Big Tech companies, analysts say promising economic data from recent months has boosted optimism about the broader economy.

Everyone expected a recession. The Fed and the White House found a way out.

At the beginning of 2023, Goldman Sachs Developed The probability of a recession is 35 percent, which is in contrast to the much higher consensus estimate of 65 percent.

But recession has not yet arrived. By November, when the S&P 500's final rise began, Goldman Sachs lowered its probability estimate to 15 percent that it was starting to rise. Announce The economy was “on its final slope” toward a soft landing.

“The Hard Landing has become a fictional Netflix documentary,” said Dan Ives, senior analyst at Wedbush Securities.

The way forward for the stock market depends largely on the Fed's continued approach to interest rates, with many investors now hoping for a rate cut as soon as March, said Wayne Wicker, wealth manager at Mission Square Retirement. .

“The one thing that contributes a little bit to the uncertainty that we've seen in the last couple of weeks is, 'Where is the Fed going with inflation?'” Wicker said. “It's a key target in terms of whether the market is right for the Fed to start cutting.” Interest rates in March, or wait until later in the year.”

The last hike in interest rates was in July, and the central bank left interest rates unchanged at its final meeting of the year, with Fed Chairman Jerome Powell noting that officials “generally believe we are at or close to there.” [the final level]”, and that raising interest rates again is “unlikely” to happen.

Analysts now see signs of a resilient economy. Inflation fell to 3.1 percent in November, well below its June 2022 peak and closer to the Fed's 2 percent target. The number of people seeking initial unemployment claims It reached 202,000 as of Dec. 14, reflecting a decrease of 19,000 from the previous week, according to a preliminary estimate from the Labor Department. Consumer spending also remained flat, rising 0.2% in October.

The S&P 500's path to Friday's close wasn't exactly smooth. Leading stock indexes appeared to stabilize in the final weeks of the year, with the S&P 500 stumbling repeatedly as it approached a record high. Farr, a Washington, D.C.-based investment consultant, noted that many funds and investment advisers tend to reallocate their portfolios at the beginning or end of the year. He also said that beating a new stock market record requires overcoming a certain level of anxiety.

“Someone has to pay a price that no one has ever paid before,” Farr said. “When you go through this stage, you will be overwhelmed by emotions until you are convinced that the downside you feared has not materialized, and you move forward.”