2024 Stock Market Outlook

February 22, 2024

In 2023, the S&P 500 showcased an impressive performance, yielding a total return of 26.29%, rebounding from a decline of 18.11% in 2022. Approximately two-thirds of the gains in 2023 can be attributed to the remarkable performance of the Magnificent 7 companies, namely Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. The economy avoided a recession during this period, thanks to its resilience marked by robust consumer spending, a healthy job market, and easing inflation, which dropped from 6.5% in 2022 to 3.4% in 2023.

As 2024 progresses, two potential paths emerge for US equities to elevate to new highs. The first scenario envisions a surge to new heights driven by strong corporate earnings and revenue growth, complemented by a resilient economy reminiscent of 2023. Alternatively, the second scenario shows a temporary market pullback marked by persistent inflation, a potential slowdown in the US economy, and/or geopolitical tensions, leading to a period of heightened volatility before ultimately reaching record highs by year’s end.

Scenario 1: The S&P 500 reaches new highs through a combination of strong corporate earnings, substantial revenue growth, and the backdrop of a resilient economy.

A Robust Earnings Outlook in the Early Bull Market of 2024

From a corporate earnings perspective, the ongoing strength of this early bull market appears promising. The S&P 500's earnings growth, adjusted for inflation, likely reached its low point in 2023 at approximately negative 5.2%. Looking forward, analysts anticipate positive earnings growth of 4.0% for the first quarter (year-over-year) of 2024, followed by a more substantial growth of 9.1% in the second quarter. Projections for the entire calendar year 2024 are optimistic, foreseeing year-over-year earnings growth of 10.9% and a parallel increase in revenue by 5.4%. Notably, positive expectations extend across all eleven sectors of the S&P 500, with each sector anticipated to experience growth in both earnings and revenue throughout the year.

Strong Labor Market and Consumer Spending Illustrate Economic Resilience

In January 2024, the U.S. labor market defied expectations by adding 353,000 jobs, nearly doubling economists' forecasts. Job gains spanned across diverse industries such as business services, healthcare, retail trade, information, and social assistance, thereby illustrating the broader strength of the economy. Additionally, unemployment has remained below 4% since 2022, and wages have outpaced the increases in the prices of goods and services by 3% since 2019, presenting a positive economic landscape. This advantageous scenario arises because as wages surge ahead of prices, workers can sustain or enhance their spending habits, which further fuels the economy. Consequently, heightened consumer spending stimulates the demand for goods and services, leading to increased job creation and elevated corporate profits—an outcome that bodes well for the stock market.

Stability Returns: Interest Rates Normalize, Paving the Way for Continued Stock Growth

Contrary to bearish sentiments, proponents of the belief that stocks and corporate earnings will decline if the FED maintains elevated interest rates find their argument challenged by the current economic landscape. The argument that higher interest rates could potentially squeeze firms' profits, restricting their ability to borrow, invest, or hire, holds less weight in the present scenario. While such concerns may have been valid in 1980 when interest rates peaked at 20%, today's rates at 5.33% are only slightly below their historical average of 5.42%. This suggests that the U.S. Federal Reserve's actions may not be a tightening of monetary policy but rather a normalization. With interest rates now back to normal, there might be less need for the Fed to lower rates significantly, especially if the resilient U.S. economy continues to operate effectively at normal rates with inflation gradually approaching the Fed's 2% target.

Furthermore, historical data supports the idea that the S&P 500 has exhibited a robust average annualized historical return of 10.26%, even during periods when interest rates surpassed their historical norm of 5.42%. The figured below illustrate the favorable performance of the S&P 500 under such conditions.

Analyzing Stock Market Performance Trends in Election Years

The historical relationship between stock market performance and election years reveals a notable trend. Over the 24 elections since the inception of the S&P 500 Index, a substantial 83% of those years witnessed positive market performance. The average return for the S&P 500 during presidential election years stands impressively at 11.28%. These historical patterns suggest a favorable landscape for stocks in 2024, aligning with the consistent positive outcomes observed in most election years.

In Scenario 2, while US equities are anticipated to reach new highs by the close of 2024, the journey might be characterized by turbulence. Persistent inflation, a potential deceleration of the US economy, and/or geopolitical tensions may prompt stocks to pause and undergo increased volatility before ultimately achieving record highs by the end of the year.

Navigating Sticky Inflation, Don’t Overreact  

In December 2023, investors welcomed the Federal Reserve's plan to reduce interest rates three times in 2024, aiming to bring rates down from 5.33% to 4.6%. The possibility of reducing interest rates stemmed from inflation approaching the Federal Reserve's 2% annual target throughout 2023. However, on Tuesday, February 13, 2024, the inflation data for January revealed a surprising reading of 3.1%, exceeding economists' predictions of 2.9%. This unexpected turn instilled fear in the markets, leading investors to abandon their expectations for rate cuts in March 2024. Consequently, both the S&P 500 and Dow Jones experienced a 1.4% drop for the day. Even though interest rates have normalized, the prospect of persistent or escalating inflation—commonly referred to as "sticky inflation"—could lead the Fed to reconsider its stance on rate cuts and opt to maintain higher rates for an extended period. While this might initially trigger an overreaction from investors, the positive aspect is that a substantial $6 trillion is sitting in U.S. money market funds, poised to be deployed into stocks at more favorable valuations.

Navigating Economic Challenges: U.S. Household Debt and the Potential for Market Impact

The onset of 2024 witnessed U.S. household debt hitting a record high at $17.3 trillion, accompanied by a surge in credit card debt to $1.13 trillion. Forecasts indicate a continual rise in debt levels throughout the year, but the potential for an economic slowdown hinges on the occurrence of significant delinquencies. A notable concern is that, despite a recent decline in the inflation growth rate, prices for goods and services persist at 19% above pre-pandemic levels. Many consumers, particularly burdened by elevated prices in essential areas like food, gas, and housing, are grappling with financial strain. Should this strain reach a tipping point where consumers limit spending due to challenges in keeping up with debt payments, it could trigger an initial decline in the stock market. However, the Federal Reserve may respond to a decrease in consumer spending by lowering interest rates, potentially offsetting negative economic and market impacts. Historical trends indicate that markets generally perform well when the Fed shifts from higher to lower rates.

Navigating Geopolitical Risks: Potential Impacts on Stock Markets

While risks themselves may not single-handedly disrupt financial markets, escalations of specific geopolitical threats could pose considerable challenges. The potential for cyber security attacks targeting governments, corporations, and critical infrastructure, including power grids and water supply networks, holds the capacity to wreak havoc on global financial markets, the economy, and people at large. Ongoing tensions between the U.S. and China add to the concerns, particularly with the recent U.S. ban on the sale of advanced chips to China, seen as having military applications. Additionally, geopolitical strains stemming from the Russia-Ukraine war strain relations between NATO (North Atlantic Treaty Organization) and Russia. As NATO countries extend financial and military aid to support Ukraine, the conflict continues without a clear resolution in sight. And while unlikely, the outbreak of a world war could result in devastating consequences. Despite these challenges, it's essential to acknowledge that risks, on their own, do not derail financial markets.

Strategic Investment Approaches for 2024

Navigating the investment landscape in 2024 demands a thoughtful approach. Building on the success of 2023, growth stocks and technology sector stocks, particularly in Artificial Intelligence, exhibited remarkable performance. For investors anticipating a resilient economy with robust corporate earnings and revenue growth, these sectors remain promising themes for the year ahead. Conversely, concerns about sticky inflation, a potential U.S. economic slowdown, or geopolitical tensions may prompt a shift toward defensive market sectors like healthcare, utilities, and consumer staples. Recognizing the uncertainty, a balanced portfolio incorporating both offensive and defensive strategies could be a prudent choice. Moreover, the landscape for income seekers has evolved, with higher interest rates making bonds, CDs, and money market funds more appealing than they have been since before the 2008 financial crisis. However, considering the potential for rate cuts in 2024, securing higher long-term rates now might be advantageous.