[Public Voices]2024 U.S. Stock Market Outlook: Looking Back at 2023

The U.S. stock market in 2023 saw a significant rise, giving the impression that the overall economy was improving and many stocks, like the indices, achieved great success. However, the story changes when we look more closely.

The S&P 500 index rose about 26%, fully recovering from the decline in 2022. The S&P 500 currently consists of 503 stocks, but only 130 of these stocks gained more than 26%. More than 180 stocks actually recorded losses. The so-called Magnificent 7 big tech stocks led the price increases, while sectors closely tied to the real economy, such as real estate, oil and gas, and utilities, continued to decline.

This phenomenon further amplified the weighting of large corporations in the index. The top 10 stocks with the highest weight account for about 31% of the S&P 500, which is more than 10 percentage points higher than the 2010s average of 20%. What problems arise when a few companies occupy such a large portion of the index?

The main purpose of passive investments like index funds is risk diversification achieved by investing evenly across various stocks. When the weighting of some stocks in the index becomes excessive, the risk diversification effect gained from investment diversification diminishes. To address this, there are regulations related to investment diversification, and index funds sometimes need to reduce the weighting of the top stocks with large weights. In such cases, index funds may sell some of the heavily weighted stocks, which could slow the price increases of those stocks that have risen sharply.

Aside from market concentration, looking at the stocks that rose throughout 2023, there is a noticeable difference compared to 2022. Technology stocks struggled in 2022, while sectors less sensitive to inflation or those affected by inflation, such as oil and gas, performed strongly. If investors sold technology stocks after losses in 2022, they would have missed out on the gains available in 2023. Conversely, those who maintained conservative positions and profited in 2022 likely had a relatively smooth year in 2023 without major losses. This shows that in the short term, the stocks that rise and fall can change significantly. Such changes can occur due to various factors, and it is important to understand the variables that influence market trends and timing.

So, can the stocks that performed well last year continue to rise this year? Given the changing industrial characteristics due to the rise of advanced industries and artificial intelligence, it is quite possible. However, structural issues with the index and index funds caused by excessive concentration in some stocks may slow momentum. Additionally, although the economic slowdown is prolonged, there is a possibility of entering a recession phase soon with falling interest rates. Unlike the slowdown phase, a recession could bring a general market downturn. In this case, it is worth recalling that technology stocks have historically underperformed compared to consumer staples or investment-grade corporate bonds and government bonds.

In 2024, not only has the risk of the index itself increased due to concentration in some stocks, but uncertainty appears greater than ever due to economic changes, the U.S. presidential election, expectations of interest rate cuts, and geopolitical issues. Therefore, risk management of investors’ portfolios will become even more important.

Professor Park Sung-kyu, Willamette University

This content was produced with the assistance of AI translation services.