Strong U.S. stock market performance could keep recession at bay this year

We are halfway through 2023 and the outlook for the U.S. economy is just beginning to look rosier if we are to gage it based on stock market performance so far.

The S&P 500 index ended the first half of a year with its fiercest performance since 2019, rising almost 16 percent, according to Dow Jones Market Data, and alleviating fears of a U.S. recession.

The strong market action is partly due to the Federal Reserve injecting more liquidity via lending to the financial sector and restoring confidence in it.

The other part of the equation is the ‘feel good’ effect created by artificial intelligence (AI) in general and GenAI in particular, driving momentum in tech stocks and overall market indices.

Read: U.S. banks borrow big from Fed

Excitement around AI and the debut of ChatGPT led to a surge in shares of companies with businesses tied to AI, including chipmakers Nvidia, AMD, and Qualcomm.

A weakness in that excitement could thus impact the broader market and make it vulnerable.

Evidence of this was recently reported by The Wall Street Journal which showed that when the Biden administration said it could impose new restrictions on the export to China of chips used for AI, shares of those companies took a hit.

But, so far, the overall picture looks good.

According to Reuters, Wall Street’s three major indexes advanced solidly on Friday, with the tech-heavy Nasdaq boasting its biggest first-half gain in 40 years. The Dow Jones Industrial Average rose 285.18 points, or 0.84 percent to 34,407.6, the S&P 500 gained 53.94 points, or 1.23 percent, to 4,450.38 and the Nasdaq Composite added 196.59 points, or 1.45 percent, to 13,787.92.   Nasdaq soared 31.7 percent during H1, 2023, its best first half since 1983.

Investors appear to ignoring recession concerns after the Fed halted its interest-rate hikes during its June policy meeting, despite signaling that further 25 basis points rate increases may still be arriving and reaching a targeted range of 5.25 percent to 5.5 percent.

Investors are also cheering recently released economic data showing U.S. growth in Q1 being higher than expected with sales of newly built homes beating forecasts, higher consumer confidence, and lower unemployment rates, all while inflation was decidedly decreasing.

However, future instability in financial conditions could make it harder to pinpoint when the U.S. could fall into a recession, if at all.

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