The S&P 500 hit an all-time closing high Friday, reflecting the staggering gains of a coterie of Big Tech firms against the backdrop of a surprisingly stable economy.
The stock market surged upward in the final quarter of 2023 as evidence gathered that the economy has not tipped into recession territory, despite the Federal Reserve’s campaign to raise interest rates. At the same time analysts point to an AI-driven frenzy on Wall Street that rivals the dot-com boom of the late ’90s, when investors sought to capitalize on the transformative gains brought by 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. Investors in 2022 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, according to S&P Global.
Voters’ feelings about the stock market and economy could affect the 2024 election, as President Biden and presumptive challenger Donald Trump will each have to defend their economic records. Trump predicted a market crash if he doesn’t win. Biden has already faced attacks from the right over inflation and gas prices, while his office has argued that he has both under control and pointed to a strong job market.
Tech companies, including a few names heavily associated with artificial intelligence work, led the S&P 500’s gains. Seven of the largest tech stocks known as the “Magnificent Seven” — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — increased 75 percent on average in 2023 and represented 30 percent of the index’s total market value at the end of 2023.
“AI is the new dot-com,” said Michael Farr of Farr, Miller and Washington. “It’s the new magic that is going to change the world that we don’t really understand yet. But we all understand it’s very powerful.”
Those seven stocks made up around half of the S&P 500’s growth last year. Nvidia, whose high-performance chips have become popular for AI uses, had the best year of the bunch, at one point gaining nearly $190 billion in value overnight, a 24 percent gain.
The skyrocketing values of Big Tech stocks followed a down year for the industry in 2022. In 2024, investors can expect that sector to be “good, but not great,” said Ross Mayfield, an investment strategy analyst at Baird & Co.
“There was concern about the rally earlier in the year that it was too narrow, not built on solid fundamentals but AI enthusiasm,” Mayfield said. “That has kind of been laid to rest in the last couple of months. You’re really starting to see leadership emerge from more cyclical and economically linked stocks and the market has broadened out.”
Other stock indexes have been surging also, with the Dow Jones Industrial Average and tech-heavy Nasdaq composite index notching records of their own in early December.
Although the rest of the market has lagged Big Tech, analysts say promising economic data from recent months has boosted optimism about the broader economy.
At the beginning of 2023, Goldman Sachs placed the probability of a recession at 35 percent, bucking a much higher consensus estimate of 65 percent.
But a recession has yet to materialize. By November, when the S&P 500’s latest rally had begun, Goldman had lowered its probability estimate to 15 percent as it declared the economy was “on its final descent” to a soft landing.
“The hard landing became a fictional Netflix documentary,” said Dan Ives, senior analyst at Wedbush Securities.
The path forward for the stock market depends in large part on the Fed’s continued approach to interest rates, with many investors now hoping for rate cuts as soon as March, said Wayne Wicker, a wealth manager with Mission Square Retirement.
“The only thing that is contributing a little bit to the uncertainty we’ve seen in the last couple weeks is, ‘Where is the Fed going with inflation?’ ” Wicker said. “It’s a key target as to whether the market has it right that the Fed will be beginning rate cuts in March, or wait until later in the year.”
The last rate hike was in July, and the central bank left interest rates unchanged in its final meeting of the year, with Fed Chair Jerome H. Powell signaling that officials “generally think we’re at or near [the final level],” and that another rate hike is “not likely” to happen.
Now analysts see signs of a resilient economy. Inflation dropped to 3.1 percent in November, far lower than its June 2022 peak and closer to the Fed’s 2 percent goal. The number of people seeking initial jobless claims came in at 202,000 as of Dec. 14, reflecting a drop of 19,000 from the previous week, according to a preliminary estimate from the Labor Department. Consumer spending also held steady as it increased 0.2 percent in October.
The S&P 500’s path to Friday’s close wasn’t entirely smooth. Leading stock indexes seemed to plateau in the final weeks of the year, with the S&P 500 repeatedly stumbling as it approached a record. Farr, the D.C.-based investment adviser, cited the tendency of many funds and investment advisers to reallocate their portfolios at the start or end of a year. Also, he said, exceeding a new stock market record requires overcoming a certain level of anxiety.
“Someone has to pay a price that no one has paid before,” Farr said. “When you go through that point, emotions will repel you until you are persuaded that the downside you had feared does not materialize, and you forge ahead.”