The S&P 500 has defied the cautious expectations of a 5-10% return in 2023 by the majority of analysts and investment firms. During the year, the index managed a return of over 24%, marking an extremely solid, and above-average year for the record. In this quick overview, we look back at what drove these returns, why they outperformed expectations, and what we expect will happen in 2024.
By now, we have all heard the story of how the “Magnificent 7”, i.e. Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla, basically drove most of the returns for the S&P 500 index in 2023.
S&P 500, “Magnificent 7” price performance in 2022 and 2023 (%)
Source: Bloomberg, InterCapital Research
As we can see, not only have the companies in question been able to regain the lost ground from 2022, they significantly improved their position, reaching some of their all-time values. Furthermore, given the fact that these shares make up over 26% of the entire S&P 500 index, their returns are disproportionately influential on the overall index movement. In fact, when the returns of these shares and weighted in 2023, it amounts to 24.4%, 0.2 p.p. higher than the S&P 500 overall return. In other words, besides these 7 stocks, the remaining 493 ones gave a negative return of -0.2 p.p.! Talk about the S&P 500 being a “representation” of the performance of the American economy.
While each individual company had a reason for solid returns in 2023, there are several factors that influenced the returns of the majority of these companies. AI has to be one of the main factors, with the boom recorded by generative AI in the last year. Cost cuts, especially for companies such as Meta, also helped boost profitability. Lastly, tech stocks are the first ones to react to negative news, but also the first ones to surge at a glimmer of hope. The fact that inflationary pressures have largely cooled off and that the Fed has stopped raising interest rates and signaled a potential for rate cuts in 2024, has to a large part contributed to the returns recorded.
This strong performance can not only be seen in these individual companies, but also in the sectoral breakdown of the S&P 500.
Sector price performance of S&P 500 (2023, %)
Source: Bloomberg, InterCapital Research
IT Technology’s return came on the back of the strong growth by not only Nvidia, Apple, Microsoft, Amazon, and Google, but also others, with 4 other companies except Nvidia recording >100% returns, most notably AMD at 158%, while all the remaining companies (40 in total) recorded >35% returns YoY. Communication services growth was supported by not only Meta but also by streaming and/or social media giants such as Netflix, Google, Walt Disney, Twitter, etc. While the gains were lower than the ones in the Information Techology sector, the continued demand for services and products in this sector, led to strong fundamental growth, which supported continuous stock price increases.
One “surprise” here is the consumer discretionary sector’s performance. During 2023, with the elevated inflation and high-interest rates present, one would expect that demand for products, especially more luxurious ones offered by Tesla, and Royal Caribbean would fall. This has not proven to be the case. Furthermore, companies such as Amazon also recorded solid growth in their delivery and e-commerce departments. In fact, all the companies in this sector, 40 of them, recorded over 30% gains during 2023. A similar trend is present with industrials and materials, as the expected recession did not materialize, and demand remained strong.
On the other hand, Utilities recorded the largest decrease, driven by increased pressure on decarbonization and the adoption of cleaner energy sources, electrification, and customer-driven disruptions. Energy was also hit due to the decrease in overall energy prices across the world, while Consumer Staples, usually held for longer time periods due to solid dividend yields, experienced cash outflows towards US Government Treasuries and bonds which offered solid returns and lower risk.
For 2023, most of the American investment firm and bank analysts expected a “cautious” 5-10% growth for the S&P 500. This has turned out to be completely wrong, but that is usually the nature of these types of predictions. 2023 started, and for the most year was marked by negative sentiment related to different conflicts, elevated inflation, higher costs of living, etc., which meant that expectations weren’t placed that high.
At the same time, given the amount of negative news present in 2022 and 2023, the investor sentiment became quite numb to all the negativity. As such, positive news related to inflation cooling off, a recession being, for the most part, avoided, and the possibility of interest rate cuts in 2024, all drove positive sentiment on the market.
So, having all of this in mind, what can be expected for 2024? One could be lazy and say “a 5-10%” return. But besides all the already mentioned factors, 2024 is an election year not just for the US, but the many other countries and regions in the world. Furthermore, many of the companies’ fundamentals are solid, demand is still high, and supply issues have mostly been resolved across the world. In summary, it could be expected that returns could end up higher, between another 10-25%, if not even more. However, given the number of factors that are at play here, two words have to be kept in mind: sentiment and volatility. As easily as these drove the positive returns last year, they could also end up driving losses this year – if for example, a deterioration in the general macroeconomic and geopolitical situation in the world occurred. In the end, as always with such predictions, there is only one true test of their accuracy – time.
