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The S&P 500 hit an all-time high on Friday, reflecting stunning gains from a group of big technology companies against the backdrop of a surprisingly resilient economy.
The broad-based index closed at 4,839.81 – up more than 1 percent on that day – surpassing the previous closing record from January 2022.
The stock market rose sharply in the final quarter of 2023 as signs mounted that the economy has not slipped into recession territory despite the Federal Reserve's campaign of interest rate hikes. At the same time, analysts point to an AI-driven frenzy on Wall Street that rivals the dot-com boom of the late 1990s, when investors sought to capitalize on the transformative gains of the early Internet.
A booming S&P 500 is a welcome sign for the millions of Americans who invest in the index through retirement accounts. According to S&P Global, in 2022 investors had about $5.7 trillion in assets passively indexed to the S&P 500 and another $5.7 trillion in funds that use it as a benchmark comparison.
Voter sentiment toward the stock market and the economy could impact the 2024 election as President Biden and his presumptive challenger Donald Trump each have to defend their economic records. Trump predicted a market crash if he didn't win. Biden has already faced attacks from the right over inflation and gasoline prices, while his office argued that he has both under control and pointed to a strong job market.
The economic mood is finally improving and consumer sentiment is improving
Technology companies, including some names heavily associated with work in artificial intelligence, led the way The S&P 500's gains. Seven of the largest technology stocks, known as the “Magnificent Seven” – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta – gained an average of 75 percent in 2023 and accounted for 30 percent of the total market value at the end of 2023 of the index.
“AI is the new dotcom,” said Michael Farr of Farr, Miller and Washington. “It's the new magic that will change the world that we don't really understand yet. But we all know 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 for AI applications, had the group's best year, at one point posting an overnight value gain of nearly $190 billion, up 24 percent.
The stock market is booming until 2024 and shaking off fears of recession
The soaring values of Big Tech stocks followed a bad year for the industry in 2022. In 2024, investors can expect this sector to be “good, but not great,” said Ross Mayfield, investment strategy analyst at Baird & Co.
“There were concerns about the rally earlier in the year that it was too narrow and based not on solid fundamentals but on AI enthusiasm,” Mayfield said. “That has kind of been put to rest in the last few months. It is becoming apparent that more cyclical and cyclical stocks are taking a pioneering role and the market is expanding.”
Other stock indices also recorded an upward trend, with the Dow Jones Industrial Average and the technology-heavy Nasdaq Composite Index each reaching their own records at the beginning of December.
Although the rest of the market has lagged behind Big Tech, analysts say promising economic data in recent months has bolstered optimism about the overall economy.
Everyone expected a recession. The Fed and the White House have found a way out.
At the start of 2023, Goldman Sachs put the probability of a recession at 35 percent, contradicting a much higher consensus estimate of 65 percent.
However, a recession has not yet occurred. In November, when the S&P 500's recent rally began, Goldman had cut its probability estimate to 15 percent, saying the economy was “on the final descent” of a soft landing.
“The Hard Landing became a fictional Netflix documentary,” said Dan Ives, senior analyst at Wedbush Securities.
The future development of the stock market depends to a large extent on the Fed's further interest rate policy, with many investors now hoping for interest rate cuts as early as March, said Wayne Wicker, asset manager at Mission Square Retirement.
“The only thing that adds a little bit to the uncertainty that we've seen over the last few weeks is, 'Where is the Fed going with inflation?' Wicker said. “Whether the market is right for the Fed to start cutting rates in March or wait until later in the year is an important goal.”
The last rate hike was in July, and the central bank left interest rates unchanged at its final meeting of the year, with Fed Chairman Jerome H. Powell signaling that officials “generally believe we are at or near.” [the final level]“ and that a further interest rate hike is “unlikely”.
Now analysts see signs of a robust economy. Inflation fell to 3.1 percent in November, well below its June 2022 peak and closer to the Fed's 2 percent target. According to a preliminary estimate from the Labor Department, the number of people filing initial jobless claims was 202,000 as of Dec. 14, down 19,000 from the previous week. Consumer spending also remained stable, rising 0.2 percent in October.
The S&P 500's path to Friday's close wasn't entirely smooth. The leading stock indexes appeared to plateau in the final weeks of the year, and the S&P 500 stumbled repeatedly as it neared record levels. Farr, the Washington-based investment adviser, pointed to the tendency of many funds and investment advisers to rebalance their portfolios at the beginning or end of a year. Plus, to beat a new stock market record, you have to overcome a certain level of fear, he said.
“Someone has to pay a price that no one has ever paid before,” Farr said. “When you get to this point, you are repelled by emotion until you are convinced that the disadvantage you feared will not happen, and you move forward.”