The Morningstar
US
Market
Index hit
a
record on
Wednesday,
January
24,
meaning
stocks
have
now
recovered
all
the
losses
that
began
piling
up
at
the
beginning
of
2022.
Surging
technology
stocks
pushed
the
index
over
the
line
to
record
territory.
The
S&P
500,
which
is
weighted
more
heavily
toward
large-cap
growth
stocks,
hit
its
record
on
Friday.
The
lag
between
the
two
records
is
another
indication
of
the
outsize
impact
megacap
tech
stocks
are
having
on
the
market.
After
returning
an
eye-watering
25.8%
in
2021,
the
Morningstar
US
Market
Index
took
a
nosedive
in
2022
and
ended
the
year
down
nearly
20%,
as
stubbornly
high
inflation
prompted
rapid
interest-rate
hikes
from
the
Federal
Reserve.
Those
headwinds
pushed
stocks
“near
their
greatest
discounts
to
our
valuations
over
the
past
decade,”
says
Dave
Sekera,
chief
US
markets
strategist
at
Morningstar.
But
2023
was
a
different
story.
By
its
end,
stocks
were
up
more
than
26%
and
traded
much
closer
to
Morningstar’s
fair
value
estimates.
The
market’s
new
high
comes
a
little
more
than
two
years
after
the
US
Market
Index
notched
its
previous
record
on
January
3,
2022.
Why
Did
Stocks
Rebound?
Markets
started
2023
on
a
tear
as
a
long-expected
recession
failed
to
materialise,
the
job
market
remained
strong,
consumers
continued
to
spend,
and
pandemic-era
distortions
began
to
unwind.
The
emergence
of
artificial
intelligence
technology
and
the
rise
of
the
“Magnificent
Seven”
pushed
markets
higher
in
the
spring
and
summer,
according
to
Sekera.
In
the
first
half
of
the
year,
the
US
Market
Index
returned
16.5%,
despite
the
bank
failures
that
rattled
investors
in
March.
It
all
fell
apart
in
July
as
the
markets
absorbed
the
Fed’s
“higher
for
longer”
messaging
on
interest
rates.
Bond
yields
soared
to
their
highest
levels
since
2007,
and
stocks
floundered.
But
it
wasn’t
long
before
a
raft
of
encouraging
economic
data
–
accompanied
by
increasingly
dovish
discourse
from
Fed
officials
–
sparked
a rally
in
the
bond
market,
with
yields
falling
sharply.
That
reversal
sparked
what
analysts
are
calling
an
“everything
rally”,
with
stocks,
commodities,
and
other
financial
assets
(even
crypto)
gaining
steam
as
investors
piled
into
bets
that
Fed
rate
cuts
are
around
the
corner.
The
market
stumbled
in
the
early
days
of
2024
but
soon
bounced
back
as
tech
stocks
soared
amid
expectations
that
the
Fed
might
not
cut
rates quite as
quickly
as
investors
have
hoped.
Where
Are
US
Stocks
Headed
This
Year?
Looking
ahead,
Sekera
says
the
stock
market
is
in
a
very
different
place
than
it
was
at
the
beginning
of
2023.
He
says
economic
growth
is
again
expected
to
slow,
but
“that
is
the
only
similarity”.
The
US
stock
market
is
now
trading
just
below
fair
value,
as
opposed
to
when
it
was
significantly
undervalued
at
the
beginning
of
2023.
Monetary
policy
is
now
set
to
ease
rather
than
tighten.
Inflation
is
finally
cooling.
Many
of
the
distortions
and
disruptions
from
the
COVID-19
pandemic
have
finally
subsided.
In
2023,
much
of
the
momentum
in
stocks
was
concentrated
in
the
Magnificent
Seven.
Sekera
says
the
critical
determinant
of
whether
the
rally
can
continue
is
whether
those
gains
can
broaden
to
other
sectors
and
other
types
of
stocks.
He
explains
some
good
news
for
investors:
“This
is
already
happening.”
He
points
to
consumer
cyclicals,
industrials,
and
real
estate
as
sectors
that
are
seeing
outsized
returns.
Mid-cap
and
small-cap
stocks
are
rallying,
too.
Earnings
Season
Risks
Sekera
warns
of
a
potential
pullback
in
February
and
March
as
earning
season
rolls
around.
He
says
the
concern
isn’t
that
companies
will
disappoint
on
earnings
but
rather
that
management
will
be
inclined
to
issue
more
conservative
guidance
(and
as
a
result,
keep
expectations
low)
as
they
look
ahead
to
an
economic
slowdown
in
the
second
half
of
the
year.
As
that
slowdown
approaches,
the
Fed
is
widely
expected
to
begin
cutting
interest
rates.
So
where
does
that
leave
investors?
“Some
of
the
best
opportunities
we
see
for
2024
are
stocks
that
are
highly
correlated
to
interest
rates,”
Sekera
says.
He
points
to
utilities
and
real
estate
as
sectors
that
meet
that
criteria.
There
are
opportunities
in
value
stocks
and
small-cap
stocks
as
well.
This
article
was
originally
published
on
Morningstar.com
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