Two the Point — Steady As She Grows: Navigating the Economic Upswing of the 2023 Economy

As 2023 draws to a close, the resilience of the U.S. economy emerges as a prominent theme, defying the widely anticipated recession. The economy has not only remained on stable footing, but has demonstrated robustness with Real GDP projected to grow at an impressive 2.5%. This growth trajectory coincides with inflation moving closer to the Federal Reserve’s (Fed) target of 2%. The labor market has played a pivotal role in this economic stability. An increase in labor supply has contributed to tempering wage growth, while a rebound in productivity has enabled companies to safeguard their profit margins effectively.

The financial markets have responded positively to these developments, particularly with the Fed’s indications of a measured approach toward policy normalization. Rather than being a detriment, this scenario is viewed as a conducive environment for earnings growth. Small-cap stocks, for instance, have significantly benefited from this sentiment, as evidenced by the Russell 2000 Index marking a new 52-week high from a 52-week low in a record turnaround time of just 48 days. While the rapid market upswing might lead to a short-term consolidation, we think the overall outlook for 2024 remains positive. The S&P 500 is a particular focal point, with earnings expectations for 2024 and 2025 forecasting double-digit growth. This anticipated earnings surge, in the context of the Fed’s gradual policy shift, aligns with historical patterns and reflects a balanced economic progression.

Key Insights:

• Economic Resilience: The U.S. economy has shown remarkable resilience, avoiding a recession with Real GDP growth expected at 2.5% and inflation trending towards the 2% target.
• Labor Market Dynamics: Increased labor supply and productivity growth have played crucial roles in maintaining economic stability and corporate profitability.
• Market Optimism: The Fed’s policy shift and the resultant market sentiment have particularly benefited small-cap stocks, evidenced by the Russell 2000’s record performance.
• Forward Outlook: The S&P 500 shows promising signs with potential double-digit earnings growth in the next two years, viewed as feasible within the context of a carefully calibrated Federal Reserve policy.