The S&P 500 made a stellar comeback in 2023. What’s next?
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The S&P 500 made a stellar comeback in 2023. What’s next?

Feb 2024
Feb 2024
photo showing S&P blocks with up and down arrows
  • Defying expectations, the S&P 500 gained 26.3% in 2023, reversing its 2022 decline. 
  • In a year full of tribulations, key factors such as tech stocks running up and US inflation cooling contributed to US equities resilience.
  • Despite forecasts, the reality is no one knows for sure how markets will perform in 2024. 
  • Rather than basing your investment decisions on short-term market movements, your time is better spent ensuring your expectations are aligned with your financial goals and risk appetite. 
  • Also find out how to invest in the S&P 500 at the lowest possible cost.

Entering 2023, you could be forgiven for harbouring pessimism about US equities. 

With the US inflation rate exceeding 6% and the Federal Reserve having already hiked rates seven times, concerns about the US market's trajectory were widespread at the start of 2023.

As the year progressed, the Fed continued raising rates, accumulating a total increase of 525 basis points between March 2022 and July 2023. 

Amid rate hikes, a regional banking crisis, a debt ceiling crisis, and wars prompted further fears that a “soft landing” – the Fed’s attempt to bring down inflation without setting off a recession – was out of reach. 

If you only read the headlines, you might have expected a repetition of the 2022 downtrend, where the S&P 500 index concluded with an 18% decline. 

However, defying expectations, the S&P 500 – which tracks the largest 500 US companies by market capitalisation – orchestrated a remarkable comeback in 2023. 

In 2023, the S&P 500 gained 26.3%, outpacing the MSCI All Country World Index (ACWI), which recorded a 22.2% gain, while the Straits Times Index (STI) returned 6.0% (in USD terms).

This resurgence was driven by the dual forces of enthusiasm for the Magnificent Seven’s AI potential and positive underlying economic indicators in the US, coupled with optimism surrounding potential rate cuts in 2024.

1. AI enthusiasm fueled gains in the Magnificent Seven

As investors sought to take risk off the table in reaction to the Fed’s 2022 rate hikes, the S&P 500 suffered drawdowns as tech giants like Meta, Tesla, Nvidia and Amazon plunged over 50% that year. 

Many anticipated a continued downward spiral among the Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla but these industry behemoths defied expectations in 2023. 

The Magnificent Seven collectively surged over 111% last year, contributing significantly to the S&P 500’s gains. 

Source: Morningstar Direct, Endowus research (returns as of 31 Dec 2023)

While cost-cutting measures helped improve profit margins and investor confidence, the real driving force behind the tech sector's resurgence was the artificial intelligence (AI) boom catalysed by the rapid emergence and use of generative AI technology like OpenAI’s ChatGPT. 

The Magnificent Seven leaned hard into the AI trend. Microsoft invested billions of dollars into OpenAI; Alphabet released its chatbot, Bard; Meta and Amazon developed AI capabilities within their products. Meanwhile, demand surged for Nvidia’s chip systems leading to a 206% increase in revenue year-on-year in Q3 2023. 

Among investors, the AI trend renewed hopes that the Magnificent Seven will be able to generate outsized profits in the future. 

2. Strong economic data and easing inflation bolster US equities’ performance

Economic data coming out of the US in the latter half of 2023 was better than anyone had anticipated. 

Inflation in the US gradually receded as the year progressed, with headline inflation cooling to 3.1% in November. Meanwhile, the US economy remained resilient despite elevated interest rates; GDP grew 4.9% in Q3 2023, underpinned by robust consumer spending and a strong labour market. 

These positive economic indicators fueled speculation that interest rates may have peaked and propelled optimism about the sustainability of the broader market’s recovery.

Technology, communication services, and consumer discretionary were the three biggest gainers in the S&P 500, followed by industrials, materials and financials.

Source: Morningstar Direct, Endowus research (returns as of 31 Dec 2023)

3. Financial sector grew despite regional banking crisis

The US regional bank crisis seems like a distant memory now, despite dominating headlines earlier in 2023. 

In March, Silicon Valley Bank collapsed after a run on deposits, which triggered a banking crisis that spread to Signature Bank and First Republic in the US and Credit Suisse, internationally. 

The risk of contagion loomed large and investors panicked, sending the financial sector plunging by 16% from its early-Feb high. But regulators swiftly intervened to prevent the situation from affecting more banks, containing the crisis. 

JP Morgan, in a strategic move, came to the rescue of First Republic Bank. The acquisition proved successful as it boosted JP Morgan’s profit margins – particularly in net interest income – and the stock gained 29.9% as of 31 Dec 2023.

In addition, the financial sector received a shot of optimism towards the end of 2023 when inflation eased with the Fed holding rates steady. 

Source: Morningstar Direct, Endowus research (returns as of 31 Dec 2023)

Expected rate cuts in 2024 partly explain the return to confidence in the financial sector. Lower rates could not only improve credit volume but also stimulate M&A and capital markets activity, and crucially, alleviate the pressure on unrealised losses burdening banks’ balance sheets.

Benefits of being diversified into the S&P 500

Though the Magnificent Seven outperformed in 2023, these companies tend to exhibit more volatility compared to the rest of the market. 

If we take a look back to 2022, the Magnificent Seven declined by 46% in USD terms while the entire S&P 500 index retracted only 18%. This means that the other companies in the S&P 500 index, outperformed the top seven companies in that year.

Moreover, the Magnificent Seven is trading at a higher Price-to-Earnings (PE) ratio compared to the rest of the market, making these seven stocks relatively more expensive than the remaining 493. 

Source: Apollo Academy

Not only do sectors operate in cyclical patterns but individual stock performance within these sectors can also vary significantly. A quick study by one of the fund managers reveals that stocks that have generated similar spectacular returns tend to not continue to outperform.

Source: Dimensional Fund Advisors - “Above the Fray” article:” Magnificent 7 Outperformance May Not Continue”

Hence, it may be difficult for an investor to accurately predict sectoral movement or select individual stocks at the right price, especially if they don't have a lot of time and resources required for fundamental research and vigilant monitoring.

Diversifying across the entire S&P 500 is a strategic approach to fortify your investments against the uncertainties of individual stocks or sectors, allowing for a more resilient portfolio during periods of volatility. 

A steadier investment experience reduces the emotional impact that can accompany sudden stock price reversals.

How to get S&P 500 exposure in Singapore in SGD and USD, Cash, CPF, SRS 

Our core portfolios are methodically crafted to include exposure to US equities and other global assets, enabling you to reap returns from the US market while mitigating risks associated with potential downturns in the US. 

By diversifying across sectors and geography, you can gain extensive exposure to a wide array of companies with various market capitalisations listed across global markets, ensuring that you’re well-positioned to capture gains in non-US markets. 

For those who prefer to gain exposure to only US equities, we offer a range of best-in-class S&P 500 funds, such as BlackRock iShares US Index Fund, LionGlobal Infinity US 500 Stock Index Fund, and Amundi Prime USA Fund on the Fund Smart platform. 

On Endowus, you can save up to 50% or more on your fees for single mutual funds bought on the Fund Smart platform.

You can invest in our core portfolios and these funds both SGD and USD, utilising your cash, CPF, or SRS. 

How to get technology stock exposure

Specifically interested in tapping into the technological frontier? Our satellite Technology portfolio is tailored to provide you access to the world's most innovative companies, including the renowned Magnificent Seven. 

You can also explore a curated selection of technology funds from top global fund managers on the Fund Smart platform with fees as low as 0.3% p.a. for Single Fund Goals via Fund Smart. Start your investing journey with Endowus today.

What’s next? Taking a long-term view 

While investors seem to be taking rate cuts as a given this year, whether inflation will be dampened enough for the Fed to start reducing rates in 2024 remains to be seen.

This optimistic macro sentiment, coupled with the strong performance in the S&P 500 might lead you to entertain inflated expectations when it comes to your investments, but it’s crucial that you continuously re-examine your return expectations to ensure that they are in line with your investment goals and risk appetite.

When your expectations are too far from the reality that plays out, you could find yourself reacting emotionally to the changing market conditions. 

After all, the S&P 500's yearly returns have shown considerable variability – let’s not forget that the story that played out in 2022 was far different than that in 2023. 

Acknowledging this inherent bumpiness on a year-to-year basis is imperative in shaping your investment expectations, and building both your confidence and resilience in your investments.

While the short-term outlook may be unpredictable, a more informed approach involves examining performance over extended periods when allocating your money to growth assets like US equities. 

The average annual historical returns of the S&P 500 over the last 10 years reveal a steadier 10.09% figure. Achieving this long-term average requires that you give your investments a generous allocation of time, often spanning decades.

That’s why setting realistic expectations is paramount to maintaining an unwavering commitment to your investment journey. 

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