The U.S. equities market in 2023 was no short of a rollercoaster ride. We saw major indices, including the S&P 500 and Nasdaq, bounce back remarkably in January after the major market sell-off that ended in 2022. From there, macroeconomics played a critical role in inciting stock market volatility. For a moment, it seemed that inflation would remain sticky and persist in particular facets of the U.S. economy, especially in the labor market. Equities, backed by strong earnings and a new fascination for everything related to AI, largely kept advancing.
Despite a significant sell-off from August to October, the S&P 500 and Nasdaq finished the year up 24% and 43.4%, respectively. In case you missed all of that, below is a comprehensive stock market review.
How AI Drove the Nasdaq to New Heights
Artificial Intelligence (AI) received incredible attention in 2023 due to the release of OpenAI’s ChatGPT. Because of its profound capabilities, ChatGPT has successfully captured the imaginations of a swath of audiences from technology enthusiasts and investors to social commentators. That led to the rise of AI stocks with triple-digit returns.
Nvidia (NASDAQ:NVDA) was one of the biggest winners in 2023, with a staggering gain of more than 233% by the end of 2023. The chipmaker had been riding high on the booming demand for its AI solutions, like the A100 and H100 chips. These power some of the most advanced and popular applications in the world, such as OpenAI’s ChatGPT and other generative AI platforms. AMD (NASDAQ:AMD) also announced its own AI chips, which contributed to its share price rally,
Moreover, stocks that announced AI-enhanced products also received excitement from the market. Some of these companies include Symbotic (NASDAQ:SYM), GXO Logistics (NYSE:GXO) and C3.AI (NYSE:AI).
Market Sell-off From the End of July to Late October
After a pretty consistent rally from the beginning of March to the end of July, equities investor sentiment began to sour. The reason was twofold: valuations had become stretched, and the macro environment was in no way reassuring.
On the macro front, there was an uptick in U.S. consumer price index in August, which rattled markets. Treasury yields in October also went out of whack. The 10-year yield topped 5%, the first time since 2007. While geopolitics surely played a role here, bondholders were also demanding more interest from U.S. treasuries as government debt continued to expand out of proportion.
Overall, the S&P 500 and the Nasdaq shed about 8% and 10%, respectively, between August and late October.
Fed Projects Rate Cuts in 2024
On December 12 to 13, 2023, the U.S. Federal Reserve’s Federal Open Markets Committee (FOMC) reconvened to discuss not only the health of the U.S. economy but also where the Federal Funds rate would ultimately land in the near-, medium- and long-term.
By the time those meetings took place, federal economic data had already pointed to a sustained cooling in consumer prices. The Consumer Price Index, for example, only rose 3.2%, from a year-over-year (Y/Y) perspective, in October, which was approximately 590 basis points lower than the peak price increase of 9.1% Y/Y in June 2022. That is to say, despite a slight, unexpected rise in CPI in August, consumer prices continued their sluggish trend downward.
Moreover, the U.S. labor market, viewed as an area of persistent, sticky inflation, also exhibited uneven signs of cooling. The unemployment rate rose to a two-year high of 3.9% in October but recovered modestly in November to 3.7%.
The amalgamation of positive trends in economic data compelled the FOMC to contemplate rate cuts for 2024 and beyond. The December FOMC Economic Projections chart below illustrates the Federal Funds rate has peaked, and rate cuts are being baked in for 2024 to 2026.
Positive news from the Fed incited another rally that ultimately ended the year.
On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
