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Most Wall Street analysts thought 2023 would be a rough year for the stock market.
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But equities defied that doom and gloom, with the benchmark S&P 500 index soaring 25% this year.
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The rise of AI and better-than-expected growth powered stocks’ surprise rally.
Stocks sprang a big – and pleasant – surprise on investors this year.
At the start of the year, many Wall Street strategists thought equities were in for another rough 12 months after a dismal 2022 well and truly popped the “everything bubble” – but that grim outlook didn’t come to pass.
Instead, key stock gauges have soared, with the benchmark S&P 500 ending the year up 25%. Meanwhile, the tech-heavy Nasdaq Composite climbed 44%, and the Dow Jones Industrial Average added 4,500 points to hit a new all-time high.
Gloomy outlooks
Back in January, those sorts of numbers seemed improbable – if not impossible.
Stocks were coming off their worst year since the financial crisis, with high inflation and rising interest rates triggering a brutal bear market.
That set a somber tone on Wall Street.
In December 2022, Bloomberg polled 22 top strategists and found that they expected the S&P 500 to rise just 7%, on average – with JPMorgan, Bank of America, and Morgan Stanley among the big-name institutions predicting a so-so year for equities.
Their consensus base case was that the gauge would fall over the first six months of the year as a recession set in in the US, before staging a second-half fightback.
Strong growth and AI fuel the rally
Fortunately for investors, the strategists were dead wrong. Stocks’ post-October 2022 rally lasted for much of this year, excluding a few quiet summer months and a brief fourth-quarter panic sparked by spiking bond yields.
Central to the surge was the fact that a long-expected recession never came to pass.
With a helping hand from Taylor Swift and Beyoncé, US growth has remained surprisingly resilient, with the country’s Gross Domestic Product expanding at the fastest pace in two years over the third quarter.
The market also rallied thanks to a massive surge in interest in artificial intelligence, with ChatGPT’s meteoric rise encouraging investors to pile into related stocks.
The “Magnificent Seven” Big Tech group – made up of Apple, Microsoft, Google owner Alphabet, Amazon, Nvidia, Facebook parent Meta Platforms, and Tesla – have emerged as beneficiaries, with the mega-caps driving over 70% of the S&P 500’s gains this year, per Goldman Sachs.
“We were wrong”
The surprise rally has triggered a bout of soul-searching on Wall Street, with many banks’ bearish stances meaning they and their clients probably missed out on stellar gains.
One mea culpa came from Morgan Stanley’s CIO Mike Wilson, ranked as the best strategist on Wall Street last year by an Institutional Investor survey after he correctly called the shocking downturn.
“We were wrong,” Wilson wrote in a July research note seen by Business Insider.
“2023 has been a story of higher valuations than we expected amid falling inflation and cost cutting,” he added.
Wilson maintained a bearish stance in his 2024 outlook, but many of his peers appear determined not to get burnt twice.
Bank of America’s Savita Subramanian, Deutsche Bank’s Binky Chadha, and Goldman Sachs’ David Kostin are among the strategists predicting that the S&P 500 will hit new all-time highs next year, with a Federal Reserve pivot seemingly on the horizon and AI expected to carry on driving gains.
If they’re right, 2024 will be another good year for the stock market.
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