MARKET COMMENTARY

In 2023, investors were initially concerned about inflation and anticipated a recession by the second half of the year. However, contrary to expectations, inflation subsided, and the economy remained robust despite a regional banking crisis in the first quarter. The Federal Reserve, which raised interest rates four times during the year, signaled no further increases in December and hinted at potential rate cuts in the coming year. Looking ahead to 2024, the focus is on scrutinizing individual company and sector fundamentals rather than macroeconomic and behavioral catalysts. In 2023, the S&P 500 delivered a return of 26.4%, with the Magnificent Seven significantly driving this performance, boasting an average total return of 104.7% and contributing over 62% to the S&P 500's gains. The surge was largely fueled by investor enthusiasm for AI. The Magnificent Seven, currently sporting an average P/E of 50, evoke comparisons to the high valuations of the Nifty 50 and dot-com stocks before their crashes. While not predicting a crash, this serves as a warning that these stocks, constituting around 30% of the S&P 500's total market cap, are at historically elevated valuations, contrasting with the more moderate valuations seen in the rest of the market. High P/E ratios signal elevated expectations for future earnings growth. Investors need to recognize that sustaining such growth is challenging, and any failure to meet these optimistic expectations could lead to a correction in the stock price. Companies with high P/E ratios are under pressure to consistently deliver robust earnings growth. If a company falls short of these high expectations, it could result in disappointed investors and a subsequent sell-off in the stock.    

The U.S. economy grew a surprising 3.1% from a year earlier fueled by strong consumer spending and hiring. A year ago, economists saw a recession as very likely and projected 0.2% growth for the year. Despite consumers facing high credit-card interest rates, resuming student loan payments and higher insurance costs, retail sales continuously exceed optimistic forecasts. American Express got a boost last quarter from card-holders’ appetite for spending on restaurants, and the company expects spending to be roughly in line with the growth seen in 2023. Consumers are headed into 2024 on a strong footing thanks to a healthy labor market, cooling inflation and steady wage gains. Those factors helped the U.S. economy defy most economists’ expectations for a recession last year.