Markets staged an impressive rally in Q4 with the U.S. leading the way. Investor sentiment moved away from the “higher [interest rates] for longer” view to a “lower and sooner” view after the Federal Reserve surprised the market with a dovish pivot. In the U.S., the market responded by increasing +12.1%. Growth and smaller company stocks outperformed, but all sectors did well.

The robust rally in Q4 helped the U.S. market log a very decent year overall, with the market increasing by +26.1% in 2023. An additional key driver for the very positive market returns was the euphoria around artificial intelligence (AI) that took Wall Street by storm in the spring. Developed international markets reported a +17.9% return for the year, and emerging markets clocked in at +11.7%.

The consensus outlook for 2024 is fairly positive with inflation falling to the Fed’s target 2.0% by year end, employment at 4.0% and GDP growth at +2.0%. Yet some forecasters believe the Fed has overtightened, creating the seeds for a recession in 2024, and others argue that the U.S. economy is going to remain resilient, preventing the Fed from pivoting to lower rates. In short, the trajectory of the stock market in 2024 will again be dependent on how inflation behaves and how the Fed responds.

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