The Dow Jones Industrial Average beat its previous record, rising more than 13%.
But what really surprised Wall Street was the tech-heavy Nasdaq Composite Index, led by a group of elite tech companies known as the Magnificent Seven, which rose more than 40% for the year. These stocks started the year on a cautious note after bearing the brunt of a historic sell-off the year before when the Federal Reserve began raising interest rates and when a recession seemed imminent. Instead, the economy remained stable and strengthened investment prospects just in time as investor attention to artificial intelligence exploded.
Most of the stock market’s rise is due to large amounts of new data. The Fed’s goal of a “soft landing” (short for lowering inflation without destroying the economy) may be on the horizon.
A recession that wasn’t
Since March 2022, the central bank has steadily raised the benchmark interest rate to its highest level in 22 years. Now it’s 5.25 to 5.5 percent. The theory is that higher interest rates will force consumers and businesses to cut spending, thereby reducing inflation.
Inflation ultimately fell, but the rate hike campaign came at a cost. New mortgage loans became difficult to obtain, and many people were excluded from homeownership. Companies that relied on loans had to scale back their expansion.
A persistent fear among some investors was that central banks would raise interest rates too much and slow the economy too much in an effort to keep prices down. The market sold off repeatedly in 2022 as investors anticipated Fed moves. The biggest losses have been in the technology sector, whose risky, growth-oriented business model makes it more vulnerable to shocks from even small changes in interest rates. The Nasdaq index lost a third of its value.
In early 2023, analysts believed there was a 65% chance of a recession in 2023, according to consensus estimates referenced by Goldman Sachs.
Rather, the latest economic data suggests that rising interest rates are having the desired effect on inflation without the worst side effects. Inflation fell faster than expected, reaching 3.1% in November. This is significantly different from the June 2022 peak of 9.1%, and puts the Fed’s 2% goal within sight. (The Fed’s recommended inflation rate is even lower, at 2.6% year over year in November.)
On the other hand, the labor market has stabilized without collapsing. Overall job growth slowed from an average of 240,000 new jobs per month to 199,000 in November, leaving the unemployment rate at 3.7% for the month. In fact, the unemployment rate remained below 4% for his two years, the last time it was achieved in his 1960s.As of Thursday, about 212,000 Americans had applied. New unemployment insurance application Weekly is widely held as a measure of layoffs near historic lows.
Consumer spending is also strong. The latest Mastercard data released Tuesday showed online spending rose 6.3% as Americans enjoyed the holiday season despite rising consumer debt and lingering inflation.
Even the global banking crisis that roiled markets in March and April, after a run on Silicon Valley banks forced them to close, failed to trigger a widespread collapse of the financial system.
Dan Ives, a senior analyst at Wedbush, estimates that about 50% of the tech sector’s gains in 2023 will come from the Fed’s success in controlling inflation, which could result in the Fed’s 2024 Expectations are high that interest rates will be cut.
The other half reflects investors exploring AI-related opportunities, creating a “perfect storm for tech bulls,” Ives added.
The year started with mass layoffs.
Amazon has cut about 27,000 jobs, citing “economic uncertainty.” Alphabet, Google’s parent company, announced In mid-January, the company announced about 12,000 layoffs, more than at any point in the company’s history, with Chief Executive Officer Sundar Pichai saying, “The economic realities we face today… “We hired for a different economic reality.” Microsoft has cut 10,000 jobs as Chief Executive Satya Nadella warns that consumers are cutting back on spending and business customers are bracing for a recession.
(Amazon founder Jeff Bezos owns the Washington Post, whose interim CEO Patti Stonesifer is on Amazon’s board.)
Tom Essay, an investor and stock trader and founder of Seven’s Report Research, said these cuts were driven by the fact that the largest tech companies are facing growth trends similar to the railroad and steel conglomerates of decades ago. Wall Street’s perception was that it was a bloated money-making giant with questionable prospects, he said.
Additionally, tech companies “aggressively built their businesses in 2021 and 2022, but didn’t get the demand they thought they would build for,” said Evercore ISI senior managing director Mark Mahaney. Ta.
However, as the year progressed, demand for these companies’ services such as advertising and online retail remained stronger than expected, although balance sheets remained strong after a season of cost-cutting, Mahaney noted. Then, a flurry of strong returns brought investors back to the technology sector.
Against this backdrop, the AI boom has created wealth for a few large companies and led to a literal renaming of tech companies. These powerful companies are now known as the Magnificent Seven. Google, Meta, Apple, Amazon, Microsoft, Tesla, and the recent newcomer, his Nvidia.
Since Nvidia revealed in May that one of its computer chips was training ChatGPT, an AI language model that wowed users with its ability to solve problems and imitate human speech, AI has been one of the biggest winners. The company’s stock price soared on the news, and is now up more than 230% since the beginning of the year.
But with ChatGPT and its creator OpenAI, it’s not the only technology company to be grateful for a significant stock price increase. Microsoft, which invested $10 billion in OpenAI in January, has seen its stock rise more than 50% this year, and 13% in the month after the OpenAI investment was first reported.
Some analysts believe the attention surrounding AI is already changing investors’ broader view of the tech sector, even for companies that don’t have AI-enabled products.
“Artificial intelligence represents a new potential growth frontier for these companies,” Essay said. “Regardless of whether your company benefits from AI or not, the market reaction is positive. This is it, and they’re piling in there.”
How quickly these investments will bear fruit is another question. While ChatGPT surprised the world with its ability to mimic human speech and thought patterns, the business case going forward is less clear, Essay said.
When it comes to technology, “the evidence has to start coming in,” Essay said. “And because [the Magnificent Seven] It’s such a large part of the S&P 500 that if it starts to underperform, it will act as an anchor for the market, no matter what else happens. ”
Eli Tan contributed to this report.