Early in January, financial media exhibited a familiar energy that was measured, circumspect, and almost practiced. Warnings of a recession were piled high like cordwood. Analysts cited slowing consumer sentiment, tightening credit, and inverted yield curves. On paper, the case appeared to be airtight. Rate increases were painful. Pain was impending, according to history. However, none of it showed up on time.
The 2023 recession never happened. Not even near. The annual growth rate of the U.S. economy was about 3%, which is almost twice the average growth rate over the previous ten years. Inflation continued its gradual decline, despite being obstinate in some areas.
| Category | Details |
|---|---|
| Index in Focus | S&P 500 (Standard & Poor’s 500) |
| 2023 YTD Gain | ~19% (as of late 2023) |
| Top Contributors | Magnificent Seven: Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia, Tesla |
| Their Share of S&P Gains | Over 70% of total S&P 500 advance in 2023 |
| NVIDIA 2024 Return | 150%+ (responsible for ~30% of US market gain) |
| Fed Funds Rate | 5.25–5.5% (held through Q1 2024) |
| US GDP Growth (2023) | ~3% annualized — well above 10-year average of 1.8% |
| US Inflation (Feb 2024) | 2.5% YoY (PCE metric) |
| S&P 500 Forecasts for 2024 | Range: 4,200 (JPMorgan) to 5,000+ (BofA, Deutsche Bank) |
| Reference | Bloomberg Markets |
And instead of collapsing under the weight of all that monetary tightening, the stock market quietly recorded double-digit gains. With the dry wit that only comes from observing this industry for decades, Art Hogan, chief market strategist at B. Riley Wealth Management, put it this way: “That’s a pretty healthy recession we had in 2023.”
What caused the forecasts to go wrong? Most likely everything at once, and nothing at all. The underlying reasoning was sound: high interest rates eventually cause economies to slow down. However, “eventually” is doing a lot of work in that sentence, and the majority of analysts misjudged the amount of leeway that American businesses and consumers still had.
The savings from the pandemic years had not completely evaporated. That obstinate old engine, the labor market, would not give up. Holding spending. When everything was combined, the macro image resembled a road with a few potholes rather than a collapsing bridge.
The forecasting community on Wall Street is perceived as having a structural bias in favor of dramatic narratives. Clicks are not produced by a soft landing. An analyst is not booked on television for a methodical, relentless comeback. Even though the recession call was incorrect, it had a clear narrative, and clear narratives are alluring, particularly when all the signs appear to be pointing in the same direction. After committing to the recessionary thesis, Hogan observed that about 80% of market commentators were stuck in that narrative corner with no way out.
In the meantime, the equity markets were experiencing something truly intriguing, but it wasn’t being distributed fairly. The major work for the entire S&P 500 was being done by seven companies: Alphabet, Amazon, Apple, Microsoft, Meta Platforms, Nvidia, and Tesla. Over 70% of the index’s growth in 2023 was attributed to these so-called Magnificent Seven. According to Hogan, the remaining 493 stocks “haven’t gotten much love.”
Though perhaps not as frightening as it sounds at first, that level of concentration is uncommon. According to research, a small percentage of stocks—sometimes as little as 2.4%—account for nearly all of a market’s wealth creation over extended time horizons. The majority of stocks are mediocre investments. Because a few outstanding businesses drive the entire market upward, markets rise.
Nvidia merits at least one paragraph, if not more. It was a mid-pack player in a crowded technology market in 2015, ranking somewhere around the 317th largest company in the S&P 500. It was momentarily vying with Microsoft to be the largest company in the world by market capitalization by the middle of 2024. In the first half of 2024 alone, the stock returned more than 150%, accounting for nearly 30% of the gains in the U.S. market during that period. This is more than the combined contribution of the bottom 490 S&P 500 companies. It’s difficult to ignore that kind of thing and experience a mixture of amazement and discomfort.
The obvious analogy is the dot-com bubble of 2000, which is mentioned in research notes, podcasts, and financial Twitter. It meets some of the same criteria, including high valuations, concentrated bets, and a technology narrative that seemed to support nearly any price. However, there are limitations to the comparison. The businesses driving the current AI boom are, for the most part, making huge profits. They are not concept stocks based solely on PowerPoint and promises.
Nvidia’s performance has consistently exceeded expectations. Real revenue figures are reflecting Microsoft’s cloud and AI integrations. These businesses are obviously real, so the question is not whether they are. Whether there is room for disappointment given the expectations built into their current prices is the question.
As 2024 approached, JPMorgan’s strategists voiced the strongest opposition, cautioning that almost all of the year’s gains in the stock market had come from a small portion of the tech sector and that the remainder of the market had essentially been sitting on its hands, unsure of the future of the economy. They were right to be concerned because a market this concentrated in a small number of names carries significant risk in the event that those names falter.
However, the same JPMorgan team that voiced structural caution also predicted that the S&P 500 would drop to 4,200 by the end of the year. The majority of other large banks were grouped between 4,750 and 5,000. Whether the pessimists or the optimists will ultimately prevail is still up in the air.
The resilience of the American labor market is what the bears consistently lack, and it’s important to state this clearly. The economic fabric has been held together by employment. Customers spend when they are employed and their wages are increasing more quickly than inflation.
Corporate profits remain stable when they spend. Equity valuations are supported when earnings remain stable. It’s not glitzy. A complex theory is not necessary. The narrative that supported all of those January recession calls is still unfinished because the labor market hasn’t collapsed yet.
As I’ve watched this develop over the past year, a larger lesson keeps coming to light. Financial markets are genuinely hard to forecast because economies are intricate, adaptive systems that react to the very forecasts made about them, not because analysts are inept—many are incredibly astute. Everyone’s behavior changes to mitigate or postpone the effects of a recession.
Businesses make proactive cost reductions. Customers retreat just enough to maintain stability rather than collapse. The loudly predicted recession partially stops itself. The analysts who made the call then examine the data and question what they overlooked.
They most likely overlooked the thing’s persistence. Bull markets and economies don’t happen overnight. The rate increases were genuine. The dangers were genuine. However, timing is crucial, and January was just too early to declare the market to be at its peak when there was still more to go than anyone wanted to acknowledge.