As Wall Street closed the books Friday on a surprisingly strong 2023, the focus is shifting to the US presidential election and other risks confronting equities in 2024.
Major indices faltered in Friday's final session of the year, but the declines were minimal compared with the winnings amassed over the past 12 months.
"This has been a great stock market year," said David Kotok, the chief investment officer of Cumberland Advisors.
Propelled by so-called "Magnificent Seven" stocks, the Nasdaq led the major US indices with a gain of 43 percent.
The Dow Jones Industrial Average tacked on 14% while the broad-based S&P 500 jumped 24%
The surge -- which was mirrored by double digit gains on leading Asian and European bourses -- has surprised leading market watchers who had bet on a recession in 2023 given the Federal Reserve's aggressive interest rate increases to counter inflation.
"We started the year fearful because there were concrete signs of recession," said Maris Ogg of Tower Bridge Advisors. "You end the year with complete euphoria."
Many of the gains accumulated since late October as market watchers cheered moderating inflation and a still-strong US labour market as indicating the US economy could avoid a recession.
The Federal Reserve's December forecast of three interest rate cuts in 2024 "poured more fuel in the market's fire," said Briefing.com analyst Patrick O'Hare.
The market also benefited from emergency measures engineered by the Fed and other US bank regulators following the collapse of Silicon Valley Bank in March.
Steps such as guaranteeing all deposits of SVB and two other banks that ended up failing contained the crisis, avoiding a broad economic impact.
The market has also cheered advances in artificial intelligence in the belief that the technology will further boost productivity and growth.
Bullishness over AI helped produce the outsized gains for the "Magnificent Seven" stocks: Amazon, Apple, Google parent Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla.
Among international markets, Tokyo's benchmark Nikkei index finished surged more than 28% in 2023, its best performance in a decade.
Frankfurt registered a yearly gain of 20.3% and Paris 16.5% having recently hit record heights.
London, however, gained less than 4% in 2023, with analysts pointing to fears interest rates could stay high due to inflation.
Political 'uncertainty premium'
For now, US investors are broadly confident of the inflation outlook.
"The market clearly closed out 2023 on a very hopeful note," said O'Hare.
Stocks could have further upside if the job market stays strong, O'Hare said. However, stocks could suffer if the economic picture deteriorates or if the Fed backs away from interest rate cuts, he said.
Analysts are currently estimating healthy 2024 earnings growth of 12%.
But given higher labor costs 2024 could prove a "difficult" year for earnings, said Ogg, who also pointed to lofty equity valuations as a potential drag.
Then there is politics.
While investors likely already have the 2024 presidential election somewhere on their radar, the time frame was too distant to affect trading in recent months.
"The uncertainty premium of political dysfunction in the US is very high and not measurable," said Kotok, who noted the unpopularity of President Joe Biden and his likely challenger, former president Donald Trump.
"The country is faced with a Biden Trump rematch that it doesn’t want," Kotok said.
Biden's approval rating was 39 percent at the end of 2023, according to Gallup.