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S&P 500: 2023 Highs and the Year Ahead

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

In the Year Till Date (YTD) as of the 11th of December, the S&P 500 has risen to around 20.5%. For all intents and purposes, the index will close the year at a net positive albeit nowhere close to the highs seen in July. Since the S&P 500 is widely considered to be the “U.S. market”, there is an imputation in some quarters that inflation/affordability concerns – along with other issues – have been shrugged off by key participants. This isn’t exactly true.

Historical Sector Analysis

A historical analysis of the index – along with a consideration of the somewhat-interrelated evolution of aggregated investor favour and the American economic engine – yields some fascinating insights:

In the year after the levee broke on the subprime mortgage market (i.e. 2009), there was an overall “normalization” of the index’s sectors, with the Real Estate sector remaining deflated but active. A couple of years after the effects of the Global Financial Crisis (GFC) were largely shrugged off (i.e. 2015), a degree of “realignment” is visible: while Energy and Consumer Staples retreated a little, nearly every other sector registered slight gains except for Information Technology (a particularly large subset of “tech” stocks).

Note: The tables are computed using the portfolio holdings of the ETF SPY. In 2009, “Not Classified” were largely “downstream” energy companies, Altaba (the now-extinct parent of Yahoo!) and Dollar General. From 2015 onwards, it was U.S. Cash.

In the present year, nearly every sector outside of Information Technology and the “tech-adjacent” Consumer Discretionary (consisting of the likes of Amazon and Shopify, among others) have shrunk in weight relative to 2015. Communication Services, which consists of the likes of Alphabet Inc and the Walt Disney Company, has held steady.

The weighted-average price within each sector, however, shows that sector performance relative to the index is heavily skewed:

In terms of performance in each quarter (plus the 11th of December) relative to the 2022’s End of Year (EOY) weighted average, Information Technology, Communication Services and Consumer Discretionary (i.e. “Tech” and then some) have shown the most extreme price swings upwards. Financials, all things considered, also remained somewhat resilient and registered strong and steady gains after Q1. The performance of nearly every other sector, however, is largely correlated with inflationary price increases through the year with no substantial overall forward outlook suggesting growth in unit consumption being imputed.

However, rising tides haven’t raised all boats within each sector but not every sector has had a similar fate:

With respect to the constituents present at EOY 2022 (and not new entrants or re-entrants), “consumer-facing” sectors such as Utilities, Consumer Staples and Health Care have had seen the highest percentages of value deflations – calculated as price seen in EOY 2022 versus the 11th of December. Geopolitical tensions lie heavy on the Energy sector, with crude oil doldrums likely to keep this sector running at neutral in 2024. Real Estate, meanwhile, has had a “fair” year with a nearly equal performance on both sides.

Stocks: Winners and Losers

In 2023, much ado was made about the “Magnificent Seven” – a collection of seven “tech” companies that have been attributed to the greatest amount of movement. In historical terms, however, the story is a little more nuanced:

As of the 11th of December, Alphabet, Microsoft and Apple have had a 200-400% increase in index weight relative 2009. In the YTD, these companies’ weights have risen by 21-45%. Amazon’s weight has grown by 874% since 2009 and 48% in the YTD. In the YTD, Tesla’s 65% weight growth outpaced all about one of the Magnificent Seven: Nvidia Nvidia is an outright champion of the Magnificent Seven, registering a 3,600% growth since 2009 and 162% in the YTD.

In terms of net performers, however, not all of the Magnificent Seven feature in the Top 10 Performers in the YTD. However, all of the performers were “Tech and then some” companies.

While the two biggest laggards this year were also “Tech” stocks, the other 8 were from “consumer-facing” sectors. On the other hand, cruise ship companies Royal Caribbean Cruises and Carnival Corporation have had their strongest showing in years.

Macroeconomic Warnings

It bears noting that Real Estate, once a cornerstone of the American buyer, is steadily eroding in its consideration as a “consumer-facing” sector: as early as 2021, it was reported that around a quarter of all U.S. homes were purchased by private investors, thus leading to an increase in rents across the U.S. Earlier this month, a municipal agency in Boston determined that private investors – an active buyer segment since 2004 – bought a little under a quarter of all homes in the city and drove up rents by up to 70% in the past two years.

Mortgages and junk bonds are typically heavily overleveraged spaces which J.P. Morgan warns in its outlook for 2024 are under increasing stress.

Given that this stress weighs less on the average private investor than on the American buyer, the argument for Real Estate being a bellwether for “average” consumer behaviour grows ever weaker.

The cruise ship companies’ performance is largely attributable to two reasons. Firstly, falling oil prices imply that “bunker” fuel is substantially cheaper and thus a significant operational cost saving for these companies. Second, they are the incidental beneficiaries of a looming gap between generations of Americans. As per a Bank of America report published in June, spending increased by 5.3% for Traditionalists (born 1928-1945) and 2.2% for Baby Boomers. In contrast, spending fell by about 1.5% for younger generations. Older generations splurged on the likes of travel, vacation and restaurants while the more-numerous younger generations face looming (and growing) student debt.

Neither the cruise ship companies nor home-building companies such as PulteGroup could be considered the leading components of the S&P 500; they presently account for a total of 0.17% in weight. Overall, JP Morgan also states in its outlook that America’s large-cap and “tech” stocks are valued over interquartile ranges. When considering the entirety of the globe’s equities, the bank contends that U.S. valuations seem entirely reasonable, given that free cash flow margins are 30% higher than they were 10 years ago and an average 11x EBITDA to interest expense.

However, what is evident is that the typical overvaluation (relative to earnings) seen in almost every American stock is steadily eroded in both mid- and small-cap stocks. This ongoing rationalization will inevitably creep into more and more stocks in the “Large Cap” space. The bank’s strategists contend that the U.S. economy could see a growth slowdown in the first half of 2024 but wouldn’t fall into a recession (at least in the technical sense).

The ongoing crush on spending upon the more-populous younger generations has not been commented upon in depth.

Index Levels and Factors to Consider in 2024

On the 13th of December, the Federal Reserve announced that interest rates will be left steady (as expected) with a forward-looking projection indicating that the policy rate will be lower by the end of 2024. While Year-on-Year (YoY) Consumer Price Index (CPI) has been nowhere close to the Federal Reserve’s target of 2%, the central bank seems disinclined to be more aggressive in mopping up excess money supply at the risks of upending markets even further in a year that is likely to be highly contentious (politically). If November’s trajectory (which largely incorporated the status quo) is any indication, it is likely that the S&P 500 will close the year at 4,800-4,830 range, i.e. 25-26% higher than EOY 2022.

The high growth seen in this year, however, and the increasing lack of breadth in corporate performance is a cause for pause with substantial empirical rationale. Since the GFC, no year like the present has been followed by a similar year of high performance.

This assertion, of course, discounts pandemic-era trajectory patterns and the massive injection of U.S. dollars into the system. Upon considering other years, however, it can be expected that 2024 will have the index experiencing a single-digit percentage growth.

A growth slowdown in the first half (H1) of 2024 is readily apparent due to current rates creating a strong pipeline of demand for the likes of Treasury Bills and high-quality corporate paper over small- and mid-cap companies as well as those in the early-stage growth while also limiting further overvaluation of top-of-the-line companies. In the second half (H2), easing rates will likely also enable financing for consumers, small- and mid-cap companies, thus creating decent tailwinds for sector rotation away from “tech” towards “consumer-facing” sectors. AI can be expected to attract investor focus until the near- to mid-term and the resulting operational cost savings on broad corporate earnings over the long run is expected to be substantial.

All factors considered, a growth rate of 6.5-7% is entirely feasible for the next calendar year. Combining this growth range with the estimate for the current year, the S&P 500 can be estimated to be entering the 5,110-5,170 range by the end of 2024.

Market movement is not expected to be predominantly unidirectional over the next couple of quarters, which means that professional investors can consider boosting returns via tactical trading using leveraged ETPs. Click here for a complete list of Leverage Shares’ products.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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