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The S&P 500 delivered an impressive total return of 26.29% in 2023, recovering from a setback of 18.11% in 2022. Going into 2024, investors are optimistic that the S&P 500 will outperform due to the same macroeconomic tailwinds, which fueled the stock market's rally in 2023, will reach new all-time highs in 2024.
Despite ongoing concerns about inflation, interest rates, debt levels and political dysfunction in Washington, DC, investors are optimistic that the Federal Reserve will achieve a soft landing for the U.S. economy and soon transition from rate hikes to rate cuts.
Falling interest rates and earnings growth could be a positive combination for stocks. However, some analysts are concerned about stretched valuations in the technology sector and the 2024 US presidential election could cause significant volatility in the market.
Stock market forecasts for 2024
The S&P 500 ended 2023 with plenty of momentum after re-entering bull market territory in June. The index marked the start of the new year with a nine-week winning streak that put it within striking distance of its first new all-time high since December 2021.
According to Sam Stovall, chief investment strategist at CFRA Research, the average S&P 500 bull market from 1921 to 2023 generated returns of 157% and lasted more than four years. This pattern suggests that the stock market rally could continue for the foreseeable future.
One of the best-performing investment themes in the current bull market has been artificial intelligence technology. Several of the best-performing tech stocks of 2023 were AI tech stocks, including AI chipmaker Nvidia.
James Demmert, chief investment officer at Main Street Research, says the AI-driven bull market may just be beginning.
“The market’s recent strength points to a new and very real AI-led bull market and economic cycle that could last a decade thanks to productivity growth and AI tailwinds,” says Denmert.
“Sophisticated investors know that this type of broad-based strength across all sectors and capitalizations is reminiscent of the first year of previous bull markets, which will continue for much longer, with inevitable corrections on the way.”
Outlook on monetary policy
The Federal Reserve made significant progress in reducing inflation in 2023, but the central bank still has much work to do in 2024.
The private consumption expenditure price index rose 2.6% year-on-year in November, compared to 2.9% in October.
Core PCE, which excludes volatile food and energy prices and is the Fed's preferred measure of inflation, rose 3.2% in November, still well above the Fed's long-term target of 2%.
Fed forecasts
In its latest long-term economic forecasts released in December, the Federal Open Market Committee forecast core PCE inflation of 2.4% and GDP growth of 1.4% in 2024. FOMC members also expect only three rate cuts by the end of 2024.
Higher interest rates increase borrowing costs for consumers and businesses, weighing on economic growth and reducing profits. Investors and analysts generally view interest rate cuts as positive for stock prices, as long as the cuts are not accompanied by an economic recession.
Fed officials have downplayed the possibility of an impending rate cut. However, many investors remain optimistic that the FOMC will cut interest rates soon in 2024, and do so more aggressively than expected. According to CME Group, the bond market expects a 70 percent chance that the Fed will make its first rate cut by March.
The market believes that the probability that there will be at least five rate cuts from current levels by the end of 2024 is over 80%.
Investor optimism about the economic outlook has improved dramatically compared to last year, but there is still a risk that a tightening of Fed policy could push the economy into recession in 2024. In fact, the New York Fed's recession probability model estimates that the probability is still 62.9%. Probability of a recession in the US within the next 12 months.
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Market sectors to watch in 2024
Analysts forecast 11.5% earnings growth and 5.5% revenue growth for S&P 500 companies in 2024.
Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year.
The healthcare sector is expected to deliver market-leading profit growth of 17.8% in 2024, while the information technology sector is expected to lead with revenue growth of 9.3%. At the other end of the growth spectrum, analysts are forecasting earnings growth of just 2.9% and revenue growth of just 1.9% for the energy sector in 2024.
In the technology sector, many investors will pay particular attention to the so-called “Magnificent Seven” mega-cap stocks that topped the S&P 500 in 2023: Apple (AAPL), Amazon (AMZN), Alphabet (GOOG, GOOGL). , Microsoft (MSFT), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA).
Nigel Green, founder and CEO of deVere Group, says many investors are questioning the Magnificent Seven's valuations after their strong performances in 2023.
“While uncertainties remain and there are compelling reasons to believe that these stocks may not surpass last year's highs, we expect them to continue to perform well and attract the attention of global investors in 2024 says Green.
These seven stocks could see a correction in early 2024, but Green says investors would be foolish to give up on them given their impressive businesses.
“Their mature market position, commitment to innovation, resilience to economic downturns and alignment with global megatrends position them for sustained success in 2024 and the years to come,” he says.
The energy sector has the highest share of analyst “buy” ratings through 2024 at 64%, followed by communications services at 62% and healthcare at 59%. The consumer staples sector has the lowest share of “buy” ratings from analysts at just 47%.
How stocks perform in election years
In the past election years in the US, returns on the stock markets were poor.
Since 1952, the S&P 500 has gained an average of just 7% in presidential election years, below its average annual total return of about 10% in a typical year.
Fortunately, since 1952, the S&P 500 has produced positive returns in every presidential reelection year in which an incumbent president is on the ballot. In fact, he averaged a 12.2% increase in those re-election years.
Since 1973, the financial services and energy sectors have been the best-performing sectors in the S&P 500 during presidential election years, while the information technology and materials sectors have been the worst performers.
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How to invest in 2024
Growth stocks and technology stocks performed extremely well in 2023 as expectations of a Fed reversal increased.
Investors expecting a soft landing in the economy and aggressive interest rate cuts in 2024 can look into both of these themes. Likewise, those concerned about persistent inflation and a possible recession in 2024 may consider increasing their exposure to defensive market sectors with relatively stable returns, such as healthcare, utilities and consumer staples sectors.
From a valuation perspective, the S&P 500's forward price-to-earnings ratio of 19.3 is currently above its 10-year average of 17.6. This premium valuation suggests that S&P 500 companies would need to deliver impressive earnings growth this year for the stock market to reach new all-time highs.
The information technology sector has the highest forward PE at 26.7, while the energy sector has the lowest at 10.8.
Jeffrey Buchbinder, chief equity strategist at LPL Financial, says investors should expect volatility in the stock market in 2024 ahead of the November election.
“LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends a neutral tactical allocation to equities with a slight overweight to cash-funded fixed income,” says Buchbinder.
LPL recommends large-cap growth stocks over value stocks in 2024.
“STAAC believes that growth-oriented large-cap stocks could benefit from lower inflation and stabilization in interest rates in the medium term,” says Buchbinder.
Additionally, he says that in a slowing economy, growth stocks may have a better chance of winning compared to the rest of the market.
Overall, analysts are optimistic about the outlook for stock prices in 2024. Analysts' consensus price target for the S&P 500 is 5,090, representing approximately 8.5% upside potential from current levels.
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