The 2023 investment story: Elements of surprise – RBC Wealth Management

January 4, 2024

Kelly Bogdanova

Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.

The mantra was “recession, recession, recession” when 2023 began.
Following a difficult year in 2022 when the S&P 500 declined 18
percent, many economists forecast the U.S. economy would succumb to
recession in 2023 due to the Fed’s very aggressive rate hike cycle, and
market strategists thought this could prolong the pain for stocks.

A recession has yet to pan out, large technology stocks took off, and the
S&P 500 ended up posting strong 24.2 percent gains for the year (26.3
percent including dividends) – well above the 10.3 percent average annual
price return since 1980.

But we think there’s more to the 2023 story than recession avoidance. Five
catalysts pushed U.S. stocks higher, and some interesting details can be
found in our charts.

2023 was a volatile yet strong year for the S&P 500 Index

  1. Stocks decline as Treasury yields climb and inflation remains high.
    Regional bank crisis hits in March.
  2. Stocks rally as regional bank stress starts to lift. Treasury yields
    pull back and the inflation rate declines notably.
  3. Stocks decline as Treasury yields surge and 10-year yield reaches
    4.99% in October. Government shutdown fears add fuel to the selloff.
  4. Stocks rally in anticipation of Fed rate cuts in 2024 and the Fed
    gets dovish, and also as yields and inflation decline and
    soft-landing sentiment rises.

Line chart showing the path of the S&P 500 Index in 2023 with text
labels describing the declines and rallies during the year. The market
initially rose from 3,839 when the year began to 4,179 in early
February. Then it began to decline as Treasury yields climb and
inflation remains hot. Regional bank crisis hits in March. Then stocks
rallied as regional bank stress starts to lift. Treasury yields pull
back and the inflation rate declines notably. This pushed the market
up to 4,588 in late July. The market then started to sell off as
Treasury yields surge and 10-year yield reaches 4.99% in October.
Government shutdown fears add fuel to the selloff. The market declined
to 4,177 in late October. The market then rallied in anticipation of
Fed rate cuts in 2024 the Fed gets dovish; also as yields and
inflation decline and soft-landing sentiment increases. The S&P 500
finished the year at 4,769.83, up 24.2%.

Source – RBC Wealth Management, Bloomberg; daily data through
12/31/23. 24.2% return does not include dividends; return with
dividends is 26.3%.

The “Big 7” AI-themed stocks dominated, but performance broadened out in

The group of stocks commonly referred to as the “Magnificent 7” or “Big 7”
trounced the rest of the U.S. equity market in 2023, rising 105 percent on
average. This group includes Apple, Microsoft, Alphabet,,
NVIDIA, Tesla, and Meta Platforms.

These are very different companies, but they all have benefited from
artificial intelligence (AI) trends (and hype), a transformative
technology they incorporate into their business models in one way or
another. (For more on AI, see
this article.)

During the first nine months of the year, the Big 7 stocks accounted for
about 75 percent of the S&P 500’s gains. They represent 26 percent of
S&P 500 market capitalization, so whether they trade up or down is a
major factor in shaping this large-cap index’s performance.

The Big 7’s outsized gains are also a key reason why the Nasdaq Composite
rallied 43.4 percent in 2023 (44.6 percent including dividends), as these
stocks trade on the Nasdaq exchange.

The good news is that market performance began to broaden out beyond the
Big 7 in Q4. In addition to the Information Technology sector, the Real
Estate, Consumer Discretionary, Financials, and Industrials sectors
outperformed the S&P 500 on a total-return basis from late October to
year end.

“Big 7” not so big on a 2-year basis

Returns in 2023 and for the past two years cumulative

Bar chart showing returns in 2023 and for the past two years
cumulative for three categories. 2023 returns: “Big 7” average 105.0%,
S&P 500 26.3%, S&P 500 excluding “Big 7” 14.7%. 2-year cumulative
returns: “Big 7” average 6.6%, S&P 500 3.4%, S&P 500 excluding “Big 7”

Note: “Big 7” stocks represent Apple, Microsoft, Alphabet,,
NVIDIA, Tesla, and Meta Platforms.

Source – RBC Wealth Management, FactSet; data through 12/31/23, data
represents total returns (includes dividends)

The Fed’s pivot played a key role

The Fed’s dramatic change in stance – pivoting from one of the most
aggressive rate hike cycles in history to forecasting multiple rate cuts
for 2024 – boosted the equity market in Q4 and we think it was one of the
key reasons that sector performance broadened out.

Not only did other large-cap sectors participate, but small-cap and midcap
indexes also rallied strongly in late 2023. The S&P Small Cap 600 and
S&P MidCap 400 surged 23.9 percent and 20.0 percent, respectively,
from late October to year end. Even dividend growth stocks, which had
lagged badly for much of 2023, rose 14.1 percent during the same period as
measured by the S&P 500 Dividend Aristocrats Total Return Index.

Most U.S. major indexes and styles posted above-average returns in 2023

Full-year total returns of key indexes and styles (includes dividends)

Full-year total returns of key indexes and styles (includes dividends)

Line chart represents nine major U.S. indexes and styles showing
performance for 2023 based on total return data (includes dividends).
Nasdaq +44.6%; Dow Jones Industrial Average +16.2%; S&P 500 +26.3%;
S&P 500 Growth +30.0%; S&P 500 Value +22.2%; Dividend Growth (S&P 500
Dividend Aristocrats Index) +8.4%; S&P Small Cap 600 +16.1%; S&P
MidCap 400 +16.4%; 60% stocks/40% bonds +15.6%.

* S&P 500 Dividend Aristocrats Index (total return)

Source – RBC Wealth Management, Bloomberg; data through 12/31/23

Declining inflation and Treasury yields, stronger-than-expected GDP, and
soft-landing sentiment helped

The consumer inflation rate dropped from 7.5 percent at the start of the
year to 3.1 percent in November (December data will be released soon).
Treasury yields surged midyear with the 10-year yield peaking at 4.99
percent in October, but it quickly fell back to 3.88 percent by year
end – just slightly above where it started the year – as the Fed became more
dovish and additional rate cuts were factored into bond market
expectations. And economists’ consensus forecast for 2023 GDP growth rose
from just 0.3 percent in January 2023 to 2.40 percent by year end.

These major changes, combined with the labour market’s resiliency, led
market participants to become more optimistic that a soft landing is

The market surged despite low earnings growth

S&P 500 earnings for the first three quarters of 2023 declined 1.6
percent compared to the first three quarters of 2022. While Q4 earnings
have yet to be reported, the consensus forecast is for growth to exceed
the year-ago period handily, and if it does, we think full-year 2023
earnings growth will rise at least 4.0 percent year over year once the
earnings surprises are factored in.

How could the market rally so strongly in 2023 amid tepid, below-average
earnings growth? Typically over short periods of time, the magnitude of
market gains and earnings growth are not tightly correlated. But over the
long term, the relationship between the two is tighter.

We think market participants began to look ahead in anticipation of
stronger earnings gains in 2024, which is another reason the broader
market rallied toward year end. For this stronger earnings scenario to
play out, the economy would need to deliver some decent growth with a
healthy soft landing, in our view.

The regional bank crisis came and went

The collapse of Silicon Valley Bank and other troubled regional banks
sparked a crisis in March, capturing the attention of investors worldwide.
But the crisis came and went, and as the regional banking system
stabilized, this group of stocks slowly stabilized and then improved.

And as the Fed pivoted toward a dovish stance and soft-landing sentiment
rose, the S&P 500 Regional Banks Index rallied 34.9 percent from late
October through year end, clawing back part of the year’s losses.

Hold your ground

Some of our charts clearly illustrate that 2023 was largely a reversal of
poor 2022 performance.

For some sectors, 2022 and 2023 returns were nearly a mirror image of each

S&P 500 and sector total returns (including dividends)

S&P 500 and sector total returns (including dividends)

Bar chart showing S&P 500 and sector total returns in three ways:
Cumulative 2-year return, and 2022 and 2023 annual returns. All data
include dividends. The bars for the 2022 and 2023 returns illustrate
that for some sectors, there was a wide difference in performance
during the two years. The returns are as follows in this order:
Cumulative 2-year, 2022, and 2023. S&P 500: +3.37%, -18.13%, +26.26%.
Energy +63.08%, -1.42%, +65.43%. Information Technology +13.34%,
-28.19%, +57.84%. Industrials +11.57%, -5.51%, 18.08%. Financials
+0.25%, -10.57%, +12.27%. Health Care +0.06%, -1.95%, +2.06%. Consumer
Staples -0.11%, -0.62%, +0.52%. Materials -1.27%, -12.28%, +12.55%.
Utilities -5.63%, +1.56%, -7.08%. Communication Services -6.34%,
-39.89%, 55.80%. Real Estate -17.15%, -26.21%, 12.10%.

Sector 2023 2022 Cumulative 2-year total return
Real Estate 12.10% -26.21% -17.15%
Consumer Discretionary 42.30% -37.03% -10.39%
Communication Services 55.80% -39.89% -6.34%
Utilities -7.08% 1.56% -5.63%
Materials 12.55% -12.28% -1.27%
Consumer Staples 0.52% -0.62% -0.11%
Health Care 2.06% -1.95% 0.06%
Financials 12.27% -10.57% 0.25%
Industrials 18.08% -5.51% 11.57%
Information Technology 57.84% -28.19% 13.34%
Energy -1.42% 65.43% 63.08%
S&P 500 26.26% -18.13% 3.37%

Source – RBC Wealth Management, Bloomberg; data through 12/31/23

We think equity returns in 2024 will mainly depend on whether the U.S.
economy succumbs to recession or achieves a much-coveted soft landing. The
year-end rally seems to be indicating the latter scenario, but we believe
there are lingering risks that the lagged effect of the Fed’s aggressive
rate hike campaign could at the very least dampen U.S. consumer spending
and GDP growth in the quarters ahead.

We would maintain Market Weight positioning in equities overall, which
attempts to balance the risks of a U.S. recession against the possibility
that one may again be averted. We recommend tilting portfolios toward
higher-quality segments of the equity market, including those companies
with resilient balance sheets, sustainable dividends, and reliable cash
flow generation.

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Vice President, Portfolio Analyst
Portfolio Advisory Group – U.S.