Key Takeaways
- The S&P 500 rallied over 24% in 2023, registering its best annual performance since 2019
- Gains were driven by falling inflation and a pivot by the Federal Reserve to a less aggressive policy stance
- Investors shrugged off recession fears, geo-political tensions, and other headwinds over the course of the year
- The tech-heavy Nasdaq led the way with a 33% jump, while the Dow rose 18%
- Treasury yields declined sharply from their highs, boosting risk asset prices
The stock market delivered astonishing returns in 2023 despite a challenging economic and geopolitical backdrop.
Major indexes rallied strongly, reversing the losses from 2022’s bear market decline and notching their best annual performances in years.
The benchmark S&P 500 surged over 24%, its biggest calendar gain since 2019. The tech-heavy Nasdaq composite soared 33%, posting its strongest year since 2020.
Inflation Cooling Sparks Stock Rally
The market turnaround began in mid-2022 when inflation data started showing definitive signs of peaking after surging to 40-year highs.
This allowed the Federal Reserve to pivot to a less aggressive policy stance after unleashing the most intense monetary tightening campaign since the 1980s.
The central bank hiked its benchmark rate seven times in 2022 to battle the price surge before slowing the pace. It raised rates just once in 2023 amid clear evidence that inflationary pressures were beginning to ease meaningfully.
Federal Funds Rate Hikes
| Year | Number of Hikes | Cumulative Increase |
|---|---|---|
| 2022 | 7 | 425 basis points |
| 2023 | 1 | 25 basis points |
The cooling of inflation towards the Fed’s 2% target boosted hopes that an economic “soft landing” could be achieved, avoiding a severe downturn while bringing price stability.
This sparked a massive rerating in equity valuations as the tightening cycle neared its end and investors looked forward to future rate cuts.
Recession Fears Fade
Persistent recession worries failed to derail the market’s melt-up as signs continued pointing to economic resilience.
A number of indicators like retail sales, the labor market, manufacturing activity, and corporate earnings results held up better than feared.
While GDP did contract over two straight quarters meeting one informal definition of recession, the declines were mild and the economy seemed to be skirting an actual downturn.
The avoidance of a severe slump boosted optimism over corporate profit trajectories, driving valuations higher.
The rally saw the S&P 500 come within striking distance of its all-time peak just under two years after the Covid-driven bear market ended.
Outlook for 2024
The stage seems set for additional gains in 2024 as the Fed’s easing cycle gets underway in earnest. Markets are pricing in rate cuts beginning in the back half of the year to further support economic growth.
However, risks remain including higher wage inflation, geopolitics, policy missteps, or financial conditions tightening too rapidly.
But for now confidence is high that the post-pandemic economic expansion can endure thanks to subsiding inflation providing room for the Fed and policymakers to carefully foster a “goldilocks” backdrop.
Upside for equities appears limited compared to 2023 but solid single digit returns look achievable along with potential new record highs.
Sector Standouts
Best S&P 500 Sector Performers
| Sector | 2023 Return | Top Stocks |
|---|---|---|
| Energy | 59% | Occidental, Marathon Oil |
| Consumer Discretionary | 26% | Tesla, Amazon |
| Technology | 33% | Apple, Microsoft |
Some of the biggest winners came from the energy patch as oil prices rebounded over the second half of 2022 before consolidating their gains.
Occidental Petroleum and Marathon Oil each rocketed over 120%, benefiting from high fuel prices and renewed optimism.
Red-hot inflation winners like Tesla and Amazon powered consumer discretionary stocks. Market leaders Apple and Microsoft lifted tech to further heights with their dominant platforms.
Final Thoughts
In the end, 2023 shaped up to be an extraordinarily fruitful year for equity investors as the Fed “put” returned to rescue markets from trouble.
Treasury yields declining by over 200 basis points from their peak last year also provided a tailwind.
While more tempered returns may lie ahead, the coast seems clear for now for America’s economic expansion to endure thanks to receding price pressures.
Barring any major shocks, markets appear primed to keep grinding higher on the back of solid consumer and business fundamentals.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
