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A year that many experts believed could end with a recession and rising unemployment instead concluded with a surging stock market and enthusiasm about the economy, as a combination of Big Tech and consumer sentiment sent financial markets barreling into 2024.
The S&P 500, a market-tracking index that underpins the retirement fortunes of millions of Americans, gained nearly 25 percent in 2023, far more than analysts had expected at the beginning of the year. “Nobody was calling for 20 percent last January. . . . I mean nobody,” said Michael Farr of the D.C.-based investment firm Farr, Miller & Washington.
The Dow Jones Industrial Average surpassed its earlier record and gained more than 13 percent.
But it was the technology-heavy Nasdaq composite index, led by a group of elite tech firms dubbed “the Magnificent Seven,” that truly wowed Wall Street, gaining more than 40 percent for the year. Those same stocks had borne the brunt of a historic sell-off the year before, when the Federal Reserve began raising interest rates, and they started the year on cautious footing as a recession seemed imminent. Instead, the economy remained stable, bolstering their investment prospects just in time for an explosion of investor attention around artificial intelligence.
Most of the stock market gains came in the final months of the year, when a slew of new data seemed to confirm once and for all that the Fed’s goal of a “soft landing” ― shorthand for bringing inflation down without breaking the economy ― might be in sight.
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The recession that wasn’t
Since March 2022, the central bank has steadily dialed up its benchmark interest rate to its highest level in 22 years, now at 5.25 to 5.5 percent. Higher rates quash inflation because they force consumers and businesses to cut spending, the theory goes.
Inflation did ultimately fall, but the rate-raising campaign also came with a cost. New mortgages became less affordable, shutting many out of homeownership. Businesses that relied on loans had to dial back expansion.
A persistent fear among some investors was that the central bank would go too far with its rate hikes, slowing the economy too much in its zeal to bring prices down. Markets repeatedly sold off in 2022 as investors anticipated the Fed’s moves. Taking some of the worst losses was the tech sector, whose riskier, growth-oriented business model makes it more vulnerable to shocks, even minor changes in interest rates. The Nasdaq index lost a third of its value.
At the start of 2023, analysts saw a 65 percent chance that the year would see a recession, according to a consensus estimate referenced by Goldman Sachs.
Instead, the latest economic data suggests the higher rates are having the desired impact against inflation without the worst side effects. Inflation has come down faster than expected, clocking in at 3.1 percent in November. That’s a far cry from its June 2022 peak of 9.1 percent and within sight of the Fed’s 2 percent goal. (the Fed’s preferred measure of inflation came in even lower, at 2.6 percent in November compared with the year before)
Meanwhile, the labor market has moderated without cratering. Overall job growth has slowed from an average of 240,000 new jobs each month to 199,000 in November, while the unemployment rate that month stood at 3.7 percent. In fact, the unemployment rate has stayed below 4 percent for two years, which was last achieved in the 1960s. As of Thursday, about 212,000 Americans were filing new unemployment claims each week, a widely followed proxy for layoffs that remains close to historic lows.
Consumer spending has also held up. Fresh Mastercard data out Tuesday showed Americans spent their way through the holidays despite rising consumer debt and the lingering bite of inflation, with online spending up 6.3 percent.
Even the global banking crisis, which rattled markets in March and April after a bank run forced Silicon Valley Bank to close its doors, failed to induce a broader collapse of the financial system.
Wedbush senior analyst Dan Ives estimates that around 50 percent of the tech sector’s gains in 2023 stem from the Fed’s success in getting inflation under control – which in turn has raised expectations that the central bank will cut rates in 2024.
The other half reflects investors’ search for opportunities related to AI, creating “a perfect storm for the tech bulls,” Ives added.
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An AI-fueled bounce back
The year began with mass layoffs.
Amazon slashed around 27,000 jobs, citing an “uncertain economy.” Google’s parent company, Alphabet, announced in mid-January that it would cut around 12,000 jobs, more than at any point in its history, with chief executive Sundar Pichai saying it had “hired for a different economic reality than the one we face today.” Microsoft cut 10,000 jobs amid warnings from chief executive Satya Nadella that consumers were cutting spending and corporate customers were bracing for a recession.
(Amazon founder Jeff Bezos owns The Washington Post, and the newspaper’s interim CEO, Patty Stonesifer, sits on Amazon’s board.)
Driving those cuts was a perception on Wall Street that the largest tech firms were bloated moneymaking giants with questionable growth prospects, akin to the railroad or steel conglomerates of decades past, said investor and stock trader Tom Essaye, founder of Sevens Report Research.
In addition, the tech companies “aggressively built in 2021 and 2022, and the demand they thought they were building for didn’t come through,” Evercore ISI senior managing director Mark Mahaney said.
As the year unfolded, however, demand for those companies’ services, like advertising and online retail, held up better than expected, Mahaney noted, while their balance sheets were strong after a season of cost cutting. A subsequent spate of healthy earnings brought investors back to the tech sector.
Against that backdrop, the AI boom reaped fortunes for a few leading firms, leading to a literal renaming of the top-tier of tech players. These heavy hitters are now known as the Magnificent Seven: Google, Meta, Apple, Amazon, Microsoft, Tesla, and the latest newcomer, Nvidia.
Nvidia has been one of the biggest AI winners after it was revealed in May that one of its computer chips had trained ChatGPT, the AI language model that has wowed users with its ability to solve problems and imitate human speech. The company’s share price spiked higher on that news and is now up nealry 240 percent from the start of the year.
But it’s not the only tech company that has ChatGPT and its creator, OpenAI, to thank for massive stock price gains. Microsoft, which invested $10 billion in OpenAI in January, has seen its stock rise more than 50 percent this year – increasing 13 percent alone in the month after its OpenAI investment was first reported.
Some analysts believe the attention surrounding AI has already transformed investors’ broader view of the tech sector, even for companies that don’t have any AI-enabled products.
“Artificial intelligence represents a new potential growth frontier for these companies,” Essaye said. “Regardless of whether your company is benefiting from AI, there is a favorable market reaction. This is it, and they’re piling into it.”
How soon those investments will bear fruit is another question. ChatGPT wowed the world with its ability to imitate human speech and thought patterns, but the business case moving forward is less clear, Essaye noted.
With tech, “the proof has to start showing up,” Essaye said. “And because [the Magnificent Seven] are such a big part of the S&P 500, if they begin to underperform, they will act as an anchor on the market regardless of what else happens.”
