Taking Stock: Q4 2023 Equity Market Outlook

Key takeaways

Q4 for the win? 2023 has offered ample fodder for bears and bulls alike, with each quarter nudging toward the latter. Which will prevail in the year’s final months? As Q4 begins, we see:

  • A slim output gap arguing for continued prudence
  • Wider gaps in profitability and valuation favoring selectivity
  • Artificial intelligence (AI) fueling dispersion, disruption and opportunity

Equity market overview and outlook

U.S. stocks typically post their best returns in the final quarter of the year. Our review of S&P 500 performance since the index’s inception in 1957 found an average Q4 uptick of 4%. (Q1 was next best at an average 2%.) In years when performance in the first three quarters came in at or above where we sit year-to-date, index moves in the final quarter were positive in all but three instances, with the October 1987 stock market crash making that year an outlier. See chart below.

We are cautiously optimistic for Q4 2023. The market has already defied expectations and the economy is operating on a slim output gap ― meaning all resources are running near full potential. This argues for a continued focus on resilience in equity allocations. Still, because much of the market’s return this year has been driven by a handful of mega-cap stocks in the “tech-plus” sectors, we believe there is opportunity to uncover those next-level stocks that have yet to be fully rewarded for their fundamentals.

When last is first: Final quarters have tended to lead