• The S&P 500 rallied for 9 weeks in a row
• Will the momentum carry in 2024

What a year 2023 has been for stocks! Equities defied inflation scares, the most rapid rate hike cycle in decades, and geopolitical risks to finish the year with incredible double-digit returns.

S&P 500 saw +22% year-over-year returns, while the heavy tech NASDAQ surged +43% over the same period a year ago.

Source: Axios

In 2023, the market was driven by large technology firms, with the « Magnificent 7 » (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA, and Tesla) driving most of the S&P 500’s gains. By mid-year, these companies accounted for 90% of the index’s increase, primarily due to the surge in AI-related innovation that grabbed investor’s minds.

However, until mid-November, the average stock’s performance remained stagnant, burdened by concerns over the delayed impact of high interest rates.

Despite a roller-coaster ride from November onwards, the major US indices were lifted by the softer inflation reading and the Fed pivoting to a more dovish tone than expected in its last two policy meetings of last year.

That led to treasury yields tumbling and equities indices skyrocketing in the last two months of 2023.

Source: FACTSET

Unsurprisingly, the top 10 stocks accounted for 17% of the total 24% returns that the index gained.

The major drivers were the AI tech stocks, also known as the Magnificent 7, who carried the market on their shoulders, along with Eli Lily and Broadcom, drove the index return, and contributed 17% of the index’s returns.

Notably, Nvidia stood out with a 229% increase, largely thanks to its booming data centers business, catering to the growing demand for advanced AI infrastructure.

Will the momentum carry into 2024?

That is the big question! Fed cuts and cooling inflation expectations should continue to provide support for equities in 2024.

Fed cuts are being more aggressively priced in.On top of that, the most popular and liquid index, the S&P 500, often goes up double digits after the Fed cut.

Expectations of rate cuts as soon as Q1’2024, with several rate cuts already priced in.

Source: Edwardjones

Furthermore, all eyes will be on the Magnificent 7, as their growth stories give wings to the whole S&P 500 index. Currently, their average EPS estimates an impressive 27% growth.

Geopolitical risks such as the Middle East conflict could spoil the party for long-only funds that bet inflation will go down, as Oil prices are impossible to predict.

Interest rates have likely peaked as the Fed starts preparing for rate cuts, inflation should continue to decline, corporate earnings rebound and valuations outside of the big year-to-date gainers look reasonable.

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