Wall Street beats 2023 forecasts and returns to records

Wall Street will exceed all forecasts in 2023, accumulating several historic closes and with fundamentals rising despite initial analyst pessimism due to high inflation and the US Federal Reserve’s (Fed) restrictive monetary policy.

The Dow Jones Industrials, which represents the nation’s 30 largest companies, is up nearly 14% over the past year, while the S&P 500 index is up 24%. The Nasdaq index of major technology companies posted the biggest gains, driven by enthusiasm for artificial intelligence (AI), with a cumulative gain of more than 43%.

All this after the Dow Jones Industrial Average topped its highest closing level seven times this month, topping 37,000 for the first time. The S&P, for its part, was less than 1% away from its best close this Friday and posted gains for its ninth straight week.

Major indexes have been supported these days by the direction of inflation, which is moving ever closer to the Fed’s 2% target, which plans to cut interest rates by up to three times in 2024.

Moreover, the central bank’s contractionary monetary policy (the official interest rate remains in the range of 5.25% to 5.5%) does not appear to have had an undue impact on the economy, and unemployment and consumption figures have defied all forecasts .

From pessimism to euphoria

The situation is a far cry from investor sentiment at the start of the year, when many predicted a recession for the world’s leading economy, with rates rising at a breakneck pace and inflation remaining very high.

Pessimism eventually spread to the banks, and several regional firms went bankrupt. This was the case with Silicon Valley Bank, First Republic and Signature Bank, whose closures between March and May raised the specter of the 2008 financial crisis.

However, the speed of action by regulators and the Fed’s soothing tone managed to contain the crisis, and investors’ attention returned to the central bank’s fight against inflation, which by then seemed to remain entrenched.

Overall, consumption showed no signs of slowing and the labor market remained close to full employment throughout the year, despite strong growth.

By the end of 2023, the price index for personal consumption expenditures (or PCE, one of the Fed’s preferred inflation measures) was 2.6% annualized, very close to the central bank’s 2% target, and many are already seeing a “soft” landing” of the economy, which is being pursued by regulators.

Year of Technology

Much of the good stock market data this year can be attributed to the so-called “Magnificent Seven”: Apple, Microsoft, Amazon, Nvidia, Alphabet (parent company of Google), Tesla and Meta (formerly Facebook).

And 2023 has seen a lot of tech news, from the popularization of artificial intelligence “chatbots” such as ChatGPT to the revamp of social network X (formerly Twitter) by its new owner, Elon Musk.

But the final push came from the Fed, which at its last meeting in December flagged the possibility of three interest rate cuts over the course of 2024.

Most investors expect the central bank to begin cutting rates starting in March, according to CME’s FedWatch tool.

Investor optimism even prevailed over the difficult geopolitical situation, as neither the war in Gaza nor disruptions in the transportation of goods across the Red Sea could overshadow the good results on the stock market.

However, some investors believe the enthusiasm is too much and that a pullback could soon occur if the Fed does not start cutting rates as quickly as investors expect.