US Stocks Defy Pessimism in 2023 to Deliver Double-Digit Returns

At the beginning of 2023, most brokerages were bearish on the outlook for US stocks amid recession fears. However, markets defied the pessimism and leading indices gave double-digit returns with the Dow Jones Industrial Average and Nasdaq 100 rising to record highs in the year.

Looking at the price action, the S&P 500 rose 24% while the Nasdaq Composite gained 43% after a brutal 33% fall in the previous year. The Dow Jones Index gained 13.7% in the year and underperformed other major indices. The Nasdaq 100 index had one of its best years ever and rose an impressive 53% during the year.

US stocks rose sharply in 2023

The first half of the year was especially fruitful for US stocks and markets rose sharply during the period amid the artificial intelligence (AI) euphoria. However, after peaking in July, US stocks fell in the subsequent months and the S&P 500 briefly went into a bear market in October.

However, November was a good month for stocks and the rally continued in December also. The S&P 500 has closed with gains for nine consecutive months and the combined worth of its constituents has risen by an impressive $8 trillion during the year.

Tech stocks led the rally in 2023

The tech sector, which was the worst-performing S&P 500 subsector last year led the rally in 2023 and Nvidia was the best-performing S&P 500 stock with gains in excess of 200%. Meta Platforms also almost tripled in the year.

Accenture, Royal Caribbean Cruises, Uber, and Advanced Micro Devices were among the other major S&P 500 gainers. Tesla, which fell to a multi-month low in January also eventually more than doubled during the year.

Meanwhile, energy stocks sagged during the year as US crude oil prices fell more than 10% to have their worst year since 2020. Energy prices saw brief rallies during the year including after the Israel-Hamas war but eventually fell amid demand worries and soaring US production.

Fed’s dovishness fueled the last leg of the rally in US stocks

Notably, the Fed took a dovish turn in its December meeting and now sees 3 rate cuts in 2024. The Fed’s dovishness helped fuel the last leg of the rally in markets.

Brian Barish at Cambiar Investors LLC said, “The notion that the major central banks have surely done enough to quell the inflationary surge of 2022-23 is powering the rally.”

He added, “It’s not hard to imagine new things for the markets to be concerned by, such as elections, the sizable bond funding requirements of the US government, and/or any notion that inflation resurges anew. But for now, there’s not much news and not a lot of sellers.”

Notably, at its December meeting, the Fed not only kept the rates unchanged as widely expected but also signaled 75 basis point rate cuts in 2024.

Larry Summers believes inflation is still a pain point

Meanwhile, former US Treasury Secretary Larry Summers is of the view that inflation still remains a pain point. He said, “I think there’s still a risk that the market is probably underestimating: that we’re not going to quite make as much progress on inflation as people hope, and that there’s not going to be quite as much room for Fed easing as people hope.”

US stocks rose amid the AI euphoria

Meanwhile, the euphoria towards artificial intelligence was among the reasons investors warmed up to US stocks. Nvidia is an immediate beneficiary of rising AI investments and the demand for Nvidia’s high-end chips has soared in 2023 amid the AI pivot. The company’s chips are a key building block for generative AI models and the euphoria has helped drive Nvidia’s earnings and stock price higher.

However, companies like Amazon, Meta Platforms, and Microsoft are also AI plays and have touted their AI plans prominently during the earnings call this year.

Amazon CEO Andy Jassy said that the company was “surprised” by the growth in generative AI. During the Q3 earnings call, he added, “Our generative AI business is growing very quickly. Almost by any measure it’s a pretty significant business for us already. And yet I would also say that companies are still in the relatively early stages.”

Analysts on 2024 outlook for US stocks

Meanwhile, analysts don’t see US stocks rising much higher in 2024 after the stellar rally of 2023. Sarat Sethi, managing partner at DCLA, said “I do think valuations are stretched, and I think they key here is that the market is so dependent on the Fed. Because that was the pivot for equities to go up. I think you’re not going to get multiple expansion, you have to have earnings growth, and we still have some geopolitical uncertainty out there.”

He added, “Things are priced to perfection, especially the Mag 7. And they can perform just fine, but I think there’s opportunities elsewhere, and I think you have to be careful after a 24% run [for the S&P 500].”

Some analysts expect double-digit returns from the S&P 500 in 2024

Even as the consensus view calls for a flattish market in 2024, some analysts predict another year of strong returns. ay Hatfield, chief executive officer at Infrastructure Capital Management has a year-end target of 5,500 for the S&P 500 and said, “We are super bulled up about the market next year.”

He added, “Our target for the 10-year [Treasury yield] is between 3% and 3.5%. And our target on the stock market only assumes 3.5%.”

Notably, the US 10-year Treasury yield stands at 3.86% which while higher than what it was at the beginning of the year, is much lower than the 5% that it hit in October. However, the 2-year yield is 4.25% – signaling a yield curve inversion which analysts see as a precursor to recession.

Meanwhile, the US economy defied recession odds in 2023 and most now believe it is headed for a soft landing, something the Fed has been trying to steer it to.

Berenberg chief economist Holger Schmieding said, “We … look for U.S. growth to fall to an annualized rate of less than 1% in H1 2024.”

Schmieding added, “Nevertheless, the Fed remains on track to pull off the usually elusive feat of a soft landing in 2024. The easing of underlying inflation has encouraged bond and equity markets to play the Fed pivot theme.”