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In 2022, the S&P 500 bounced back from its worst year in over a decade, and it is on track to finish 2023 up as well, with a gain of about 21% through November 30. The ride for investors hasn’t always been a smooth one, though. Most of the market’s gains came early in 2023.
Despite concerns over inflation and rising interest rates, an unexpected regional banking crisis and rising geopolitical tensions around the world, the U.S. economy remains resilient and corporate profits are on the rise. Technology stocks regained their swagger in 2023, with the so-called “Magnificent 7” mega-cap tech stocks leading the charge.
Market Performance
As of the end of November 2023, the S&P 500 has posted a total return of about 21% for the year, well above its average annual return of around 10%.
Technology, communication services and consumer discretionary stocks have notched big rebounds in 2023. So have growth stocks in general. One key factor has been the investor shift in focus from rising interest rates to the possibility of rate cuts as soon as early 2024. The tech-heavy Nasdaq Composite has gained around 37% in 2023. The blue chip Dow Jones Industrial Average is up about 11% on the year.
Not only have they rebounded dramatically, but the high-growth, cyclical technology, telecom and consumer discretionary sectors have been the top-performing S&P 500 sectors of the year. Defensive sectors, including the utilities, healthcare and consumer staples, have been the biggest laggards in 2023.
The 2023 market strength has been buoyed by the “Magnificent 7” mega cap tech stocks—Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL), Nvidia (NVDA), Meta Platforms (META), Microsoft (MSFT) and Tesla (TSLA). All seven stocks have more than doubled the S&P 500’s gains so far this year.
Banking Crisis
The stock market’s stability and strong performance heading into 2024 are particularly impressive given how a regional banking crisis rattled the markets in the spring of 2023.
In a span of just a few weeks, mounting losses on cryptocurrency investments, sharp downturns in the value of bond portfolios and commercial real estate investments, not to mention aggressive runs on bank deposits, triggered the collapse of Silvergate Bank, Silicon Valley Bank, Signature Bank and First Republic Bank.
U.S. regional bank stock prices plummeted across the board as investors lost confidence in the banking industry and feared the contagion could spread to other banks as well.
A broader and deeper banking crisis was likely averted as the Federal Reserve stepped in. The central bank provided emergency loans to distressed banks. And it assured customers of the failed banks that they would fully recover their deposits even if they exceeded the $250,000 insurance guaranteed by the Federal Deposit Insurance Corporation.
Several larger banks, including JPMorgan Chase (JPM) and New York Community Bancorp (NYCB), also stepped in to acquire the assets of the failed banks.
Simultaneously, Fed Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen repeatedly reassured Americans that the banking industry was stable and their deposits were safe, and the brief banking crisis ultimately ended with relatively little disruption to equity markets.
Best & Worst Stocks of 2023
This year has been a good year for investors across the board, but a handful of S&P 500 stocks have stood out in a crowd of strong performances, while some S&P 500 stocks missed out on the 2023 market rally entirely.
Some of the Best Performing Stocks of 2023
Nvidia (NVDA). High-end semiconductor stock Nvidia has gained 220% year-to-date, by far the best performance of any stock in the S&P 500. Nvidia’s data center business has boomed as companies rush to upgrade their infrastructure to handle intense AI workloads.
Meta Platforms (META). Shares of Facebook and Instagram parent company Meta Platforms have rallied 172% in 2023 as the online advertising market recovered from a 2022 downturn. In addition, Meta has proven that it can still grow revenue and profits at an impressive clip while investing heavily in AI technology and the metaverse.
Royal Caribbean (RCL). Since the cruise industry was completely shut down during the Covid-19 pandemic in 2020, cruise stocks have been mostly dead in the water. However, pent-up cruise demand has helped Royal Caribbean revenue rebound in 2023, which fueled the stock’s impressive 117% year-to-date gain.
Some of the Worst Performing Stocks of 2023
Solaredge Technologies (SEDG). This year has been brutal for the solar energy industry as demand for rooftop solar systems has dropped and credit markets have tightened. As a result, shares of Solaredge Technologies, which designs solar inverters, are suffering from a big chill, down about 72% year-to-date.
Enphase Energy (ENPH). Solar microinverter producer Enphase Energy reported its year-over-year revenue growth dropped from positive 68% in the fourth quarter of 2022 to negative 13% in the third quarter of 2023. As its growth ran out of power, Enphase shares declined 62% year-to-date.
FMC Corporation (FMC). Shares of agricultural-chemicals specialist FMC (FMC) have tanked in 2023 as inventory destocking hurt the company’s revenue and earnings growth. The stock is down 56% on the year, and FMC’s management recently said they do not expect market conditions to improve in the near future.
Top Investment Themes of 2023
In addition to technology stocks and growth stocks, a handful of specific investment themes delivered some big gains in 2023.
ChatGPT and other generative AI products and services took the world by storm this year, and investors flooded into stocks with exposure to the AI theme. It seems inevitable that AI will play an increasingly important role in the future economy, and investors appear to recognize the market is still in the early innings of a long-term AI technology boom.
The 2022 “crypto winter” finally thawed in early 2023, sending Bitcoin (BTC) prices soaring 128% year-to-date as investors anticipate the potential launch of the first spot Bitcoin ETF in early 2024.
In addition to cryptocurrencies themselves, the crypto market rally spilled over to cryptocurrency-related stocks, such as Bitcoin investor MicroStrategy (MSTR) and Bitcoin mining company Cipher Mining Technologies (CIFR).
When Israel officially declared war on Hamas in October, the global geopolitical outlook darkened. Investors are impacted too, but some effects appear likely to aid certain stocks and sectors. For one thing, the ongoing war in Ukraine and the new conflict in the Middle East likely mean growing global defense budgets. Aerospace and defense stocks such as TransDigm (TDG) and Kratos Defense & Security Solutions (KTOS) have performed very well this year.
Inflation and Interest Rates
The biggest market moving factors in 2023 appear to have been inflation and interest rates. Higher interest rates increase borrowing costs for consumers and companies, weighing on economic growth and profitability.
Looking Back: Inflation and Interest Rates in 2023
The Federal Reserve was forced to begin aggressively raising interest rates, starting in March 2022, in a campaign to bring down surging inflation. In 2023, investors saw signs that the Fed’s monetary policy tightening was paying off, dampening the rise of inflation without—at least so far—triggering a recession.
Year-over-year consumer price index (CPI) inflation peaked at 9.1% in June 2022 but had already dropped to 6.4% by January 2023. That downward trend continued throughout 2023, bringing CPI inflation down to just 3.2% as of October.
While inflation remains well above the Fed’s long-term target of 2%, the central bank’s progress has allowed it to take the foot off the gas pedal in raising rates. The Federal Open Market Committee has issued just four rate hikes of 25 basis points each in 2023 and has not raised rates since July.
Looking Ahead: Inflation and Interest Rates in 2024
Looking ahead, the bond market is pricing in a nearly 80% chance the FOMC will pivot from rate hikes to rate cuts by May 2024.
Bill Adams, chief economist for Comerica Bank, says U.S. consumers have held up relatively well in 2023 despite a difficult environment.
“Most people who want jobs have them, and Americans are confident about their job prospects in 2024. High prices are still a source of frustration, but income growth has outpaced inflation since May, bolstering spending power,” Adams says.
James Demmert, chief investment officer at Main Street Research, says the 2023 stock market strength has been driven largely by the Federal Reserve’s success in bringing down inflation.
“The recent stock market rally is a result of investors realizing that the biggest long-term headwind for stocks, the Fed and inflation, are no longer a threat and that the Federal Reserve is finished with its rate hiking campaign. Inflation is trending lower and the Fed’s war against it is finished,” Demmert says.
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2024 Stock Market Outlook
Heading into 2024, economists and analysts are relatively bullish on the outlooks for the economy and the stock market. Elevated interest rates will likely weigh on economic growth, but the Federal Reserve is projecting U.S. GDP growth will remain positive in the coming year.
Analysts are forecasting 11.6% earnings growth for S&P 500 constituents in 2024, and the average analyst S&P 500 price target of 5,029 suggests the index will gain about 10% and make new all-time highs in the next 12 months.
Nigel Green, founder and CEO of deVere Group, says certain stocks should outperform in 2024 as interest rates fall.
“As interest rates stabilize or decline, the appeal of higher-yielding assets, such as dividend-paying stocks, will rise,” Green says.
“Conversely, sectors that traditionally perform well in a rising rate environment, such as financials, could face headwinds.”
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